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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.
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Operator<\/strong>: Welcome everyone, and thank you for standing by for the Alphabet first quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker’s presentation there will be a question and answer session. To ask a question during the session you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>Thank you. Good afternoon, everyone, and welcome to Alphabet’s first quarter 2022 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat. Now I’ll quickly cover the Safe Harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such 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 most recent Form 10-K filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor. And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thank you, Jim, and good afternoon, everyone. <\/p>

Over the last few months, guided by our mission, we continued to develop helpful technologies with a view towards empowering both people and businesses. Even as more people return to in-person activities, we’re seeing hybrid approaches to learning and working are here to stay, and our products are helping partners seize these new opportunities. <\/p>

To help support our own flexible work plans, this year we plan to invest approximately $9.5 billion in our U.S. offices and data centers, creating at least twelve thousand new Google jobs in the U.S., in places like New York and Atlanta.<\/p>

To enable our long term growth, we’re investing in areas like Cloud, AI, YouTube, Search and beyond. In 2020 and 2021 combined, we invested $40 billion in research and development here in the U.S. <\/p>

Beyond the U.S., we’ve announced new office investments in London and Warsaw, and a new product development center in Nairobi. We’re excited for the product development they’ll support. We’ll share more about these investments at Google I\/O, our annual developer conference on May 11, and I encourage you to tune in. <\/p>

Turning now to Product Highlights, AI continues to be at the heart of our core Search and information products. <\/p>

We launched multisearch in Google Search this quarter. It’s a new way people can find what they need using both images and words. For example, you can snap a photo of a shirt pattern and then type the word “green” to find a green shirt with that pattern. We also shared new features in Search to help people find healthcare providers who take their insurance, and book appointments online. With ads automation, search ads, powered by AI, are helping our customers quickly respond to the market conditions most relevant to their business. Philipp will discuss this in more detail.<\/p>

Let’s move to YouTube. We continue to support our community of creators, advertisers and viewers. With over two billion monthly signed-in users, we’re well positioned to do this. YouTube over the past two years has seen significant growth and has become a central destination for entertainment, learning and educational content. And even as people have returned to in-person activities, time spent on YouTube has continued to grow. Just as YouTube evolved from desktop to mobile, and that created huge opportunities, we’re excited about the new opportunities we see now. Short form video is one. YouTube Shorts is now averaging over 30 billion daily views -- that’s four times as much as a year ago. In the first quarter we added new capabilities to video editing, and we’re continuing to invest in making Shorts a fantastic experience for creators and viewers alike.<\/p>

As we’ve always done with products, we focus on building a great user experience first, and we will work to build monetization over time. The Living Room is another area of opportunity. On average, viewers are watching over seven hundred million hours of YouTube content on televisions every day. And in the year ahead, we’ll give YouTube’s Connected TV viewers new smartphone-controlled navigation and interactivity features, allowing people to comment and share content they’re watching on television directly from their devices.<\/p>

Turning next to our computing platforms…<\/p>

A few weeks ago, we marked a big milestone -- our hundredth release of Chrome and Chrome OS. Over the years, we’ve worked with developer and OEM partners to improve speed, simplicity and security, and move the web forward. It’s a great example of what we mean when we say we’re building for the long term. <\/p>

And on Android, we’ll showcase at I\/O the many helpful features and services that Android and its platforms provide. Over the coming years, we’ll continue to invest in new form factors, seamless multi-device experiences, and raising the bar for user privacy, while giving developers the tools they need to succeed on mobile.<\/p>

As you know, we’ve made changes to our Google Play pricing model to help all developers on our platform succeed. Today, ninety-nine percent of developers qualify for a service fee of fifteen percent or less. While this impacted our short term results, we think it’s the right long term approach to support the ecosystem and to be the most developer friendly app store and gaming platform available. <\/p>

We’re also exploring alternative billing options, and as we do this, we’ll continue to uphold high safety standards that protect personal data and sensitive financial information. Earlier today, we launched the data safety section in Play, where people can access more information about how apps collect, share and secure their data.<\/p>

In hardware, Pixel 6 is a huge step forward for the Pixel portfolio, and it’s been great to see the response from Pixel users. It’s the fastest-selling Pixel ever and we are building broad consumer awareness of the brand, and making good progress. I am excited about the products we have coming and look forward to sharing more at Google I\/O.<\/p>

Next, onto Cloud, where Q1 revenue grew 44% percent year-over-year with continued strong performance across Google Cloud Platform and Workspace. We continue to deliver differentiated products across four distinct areas: First, Cybersecurity, where we introduced new offerings, including assured Workloads to address digital sovereignty in the European Union; Virtual Machine Threat detection, a first-to-market agentless malware detection capability; And advanced Intrusion Detection System for network threat detection.<\/p>

Organizations like T-Mobile and DoorDash are protecting their critical systems and data with Google Cloud’s trusted cybersecurity products. These include: Security Command Center, which helps many companies, including UKG-Ultimate Kronos Group and Ocado Group, monitor and manage their security posture and risk. Our leading threat detection and response platform, Chronicle, is now paired with Siemplify to more quickly automate incident detection and resolution. We also announced our intent to acquire Mandiant, a leader in dynamic cyber defense and response, to help protect customers from the most advanced threats.<\/p>

Second, we continued to evolve our leading Data Cloud with Serverless Spark, to run batch Spark workloads; BigLake, a new storage engine that unifies data warehouses and lakes; and Dataplex, which provides unified management and governance of data across data warehouses and lakes. Our unified Data Cloud and AI platform is helping organizations like KeyBank, LG Electronics, and Macy’s work intelligently with data across multiple clouds. BigQuery, our leading solution for analytics, is helping customers like Kraft Heinz, Mercado Libre and Virta Health create more personal consumer experiences. BT Group, UPS and other leading brands, continue to tap our deep expertise in artificial intelligence and machine learning to power their organizations. This includes our Contact Center AI Platform, which helped The Home Depot improve their call containment by one hundred and eighty five percent - creating a more positive customer support experience. We are proud to share that more than 700 technology partners power their applications with our Data Cloud.<\/p>

Third, our open, secure infrastructure remains a differentiator as it enables customers to run their workloads and apps where they need them. This is winning global brands like Dun & Bradstreet, Boeing, and Kyocera. Our product leadership continued, with the release of Tau VMs, which offers price-performance that’s more than 40 percent better than any other leading cloud, and Google Distributed Cloud Edge, a new edge solution designed to run telecommunication networks at scale, which is helping Bell Canada evolve its 5G network. And we further expanded our regional footprint globally. Leading companies like Mahindra are choosing us for large-scale IT transformations and migrating their data centers to Google Cloud; while Sony’s Crunchyroll uses our infrastructure and networking capabilities to power the largest anime streaming service in the world. Our scalability enables Ninja Van, the leading logistics provider in Southeast Asia, to handle more than 10X their normal traffic during peak times.<\/p>

Finally, we continue to advance Google Workspace. To support hybrid work, we recently introduced new collaboration features, including bringing Google Meet directly into Google Docs, Sheets, and Slides. You can now see and hear your team as you collaborate in real-time without the need to schedule meetings. Google Meet can now livestream to up to one hundred thousand people who can also participate in Q&A and polls.<\/p>

We also launched the next wave of innovation in Google Docs with smart canvas, including: auto-generated summaries and pageless format in Docs, smart chips, and automating workflow using Gmail. Smart canvas has seen very rapid uptake with more than six million checklists and six million smart chips being added to documents each week.<\/p>

These innovations are helping employees adapt to hybrid work at large enterprises like Equifax and Ocean Network Express, digital natives including FlipKart, and organizations like the University of Alberta.<\/p>

Finally, our Other Bets. This month, Waymo became the first company to run fully autonomous ride-hailing operations in multiple locations simultaneously. Today, employees can take rider-only trips in San Francisco, joining the growing number of public Waymo One riders in Phoenix. Wing launched its on-demand drone deliveries in the Dallas-Fort Worth area. In the first quarter of 2022, Wing completed over fifty thousand commercial deliveries. That’s up more than 3X year-over-year.<\/p>

As you know, sustainability continues to be a big focus for us. In addition to our own ambitious goals to operate on 24\/7 carbon-free energy by 2030, we recently joined Frontier, a new coalition with Stripe and many others, jointly committing more than nine hundred million dollars to accelerate carbon removal solutions.<\/p>

Before I close…we remain deeply concerned about the war in Ukraine, and the humanitarian crisis unfolding in the region. While I was in Warsaw, Poland last month, I met with many leaders across Central and Eastern Europe to reaffirm our commitment to the region. We’re finding ways for our products and platforms to be helpful, including enhanced features on Search to help refugees find resources. <\/p>

Across all of these efforts, I feel inspired by the ways that our teams at Google work to help people in moments big and small. With that, let me thank Googlers everywhere for their contributions this quarter. Over to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google<\/strong>: Thanks, Sundar - and hi everyone. As always, it’s great to be with you all. I want to start by echoing Sundar - the war in Ukraine and the deepening humanitarian crisis across the region is heartbreaking. As with our response during the global pandemic, we remain focused on how we can help. <\/p>

Whether it’s air raid alerts on Android phones to help Ukrainians get to safety, refugee centers live on Maps, or new attributes that let hotels share if they’re offering free or significantly discounted accommodations for those in need or whether it’s helping via insights - which enabled Ukraine’s largest person-to-person marketplace, OLX Ukraine, to pivot its product strategy nearly overnight to help people find essential products and services.<\/p>

Let’s take a quick look at our performance this quarter before we dive into the trends that drove it. In Google Services revenues, we were pleased with the growth in the first quarter – up 20% year-over-year. Retail was again, the largest contributor to year-on-year growth of our Ads business in Q1, followed by Travel. Speaking of travel. People are seemingly back on the move – whether they’re searching for planes, passports, or their next vacation destination, Q1 travel searches were above Q1 ‘19 pre-pandemic levels. Query growth in categories like “beaches and islands” were up 27% vs. 2019, while “vacation rentals” rose 37%. Compared to last year, global searches for “passport online” jumped 80%, while searches for “travel insurance” surged 2X.<\/p>

We continued to launch new tools to help travel partners re-connect with customers and to help users find the trusted info they need to plan their next trip. In March, free hotel booking links expanded to Search and Maps - travel partners can extend their reach; users get a more comprehensive set of options. And earlier this month, we made it possible for hoteliers to easily share their rates and availability directly on Google via Business Profile.<\/p>

Let’s talk Performance Max – our newest AI-powered campaign that allows businesses to harness the best of automation to drive the most optimal performance across all Google Ads inventory. Since launching globally in November, PMax has seen strong customer adoption, particularly among smaller businesses. PMax’s simplicity shows how we’re moving from a model in which businesses needed to understand a complex language of campaigns, keywords, CPCs, etc. – to a model where we understand a company’s goals and actively help them achieve their business objectives. Take AssistCard, a leading LATAM travel assistance company, who first tested PMax to accelerate its recovery in Argentina. Initial tests to drive sales yielded a 40% lower cost-per-acquisition and a 15X higher conversion rate vs. other campaigns with the same goals. Early success led AssistCard to rapidly expand PMax to nine other countries including Brazil, Spain and the U.S. - and significantly increase spend on the new format in 2022.<\/p>

Moving onto Retail, where we had another strong quarter. Consumers are finding a new balance between online and in-person. Google Maps searches for “shopping near me” were up 100% globally year over year. People want to buy from brands that provide a seamless experience – wherever and whenever they prefer to shop. For local businesses and big-box retailers alike, this remains a big opportunity. Omnichannel is still the winning strategy. <\/p>

We’re also continuing our investments to make shopping on Google as effortless, delightful, and as engaging as possible. With rich, more immersive content - including more visual and browsable results for apparel and fashion searches – and new advancements like multisearch in Google Search - which launched in beta for shopping queries earlier this month - we’re helping people go beyond the Search box, to search anywhere and any way. <\/p>

Take AR beauty – which is still in its early days but a great example of the innovative and cool experiences we’re building to benefit both users and brands. Shoppers can now virtually discover and “try on” thousands of products from 90+ brands including Maybelline New York, M.A.C., and Charlotte Tilbury as well as from retailers like Ulta Beauty – right in Google Search.<\/p>

Let’s move onto YouTube. Our Brand business had a strong quarter, however we did see more modest growth in direct response. For brand, we’re enthusiastic about what’s ahead for Connected TV. Brands are turning to us to tap into the shift to streaming and reach new audiences in smarter and more efficient ways. Over 135 million people in the U.S. were reached via YouTube on Connected TVs in December. We’ve recently rolled out new tools to help advertisers consistently plan and measure their CTV spend across platforms – and later this year, in partnership with Nielsen, we’ll help brands directly compare their YouTube reach to linear TV – including the ability to measure “co viewing.” This apples-to-apples comparison will be a game-changer in helping advertisers make smarter investment decisions.<\/p>

According to Nielsen, in the U.S., YouTube accounts for over 50% of ad-supported streaming watch time on connected TVs among people ages 18 and up, and over 35% of viewers in this group can’t be reached by any other ad-supported streaming service. In other words, we’re seeing that when users choose to watch ad-supported CTV, they choose to watch YouTube and YouTube delivers CTV audiences that advertisers can’t reach anywhere else. Brands are taking notice.<\/p>

Like Warner Bros. who leaned into YouTube to help drive awareness among key audiences for The Batman. By using a combination of best-performing video creative, Connected TV media, and Video Ad Sequencing, Warner Bros. expanded its target audience in the two weeks leading up to its release - helping contribute to its successful $134 million opening weekend. <\/p>

For direct response - we continue to believe there’s great opportunity to address commercial intent on YouTube - between Video Action Campaigns, App Campaigns, product feed and, new live commerce features.<\/p>

As Sundar mentioned, Shorts is another area we’re really excited about. Engagement is strong, and we’re focused on delivering great experiences for users, creators, and advertisers. In fact, we’re testing ads on Shorts with products like App Install and Video Action Campaigns – and while it’s still early days, we’re encouraged by initial advertiser feedback and results. <\/p>

Which brings me to our partners – and how we’re closely collaborating with them to grow and evolve healthier, sustainable ecosystems and bring them the best of Google. <\/p>

We continue to focus on accelerating growth in India’s digital ecosystem and are excited about our expanding partnerships with a number of partners in the region. <\/p>

Then, Sundar mentioned Sony’s Crunchyroll – beyond Cloud, we’re working across Android, Google Play, Google TV and more to help Sony and Crunchyroll acquire and retain more users and fans and strengthen its leadership in the direct-to-consumer anime streaming market.<\/p>

As always, I want to extend deep appreciation to our customers and partners for their collaboration and trust. And to our product, engineering, partnership, sales, and many support teams - thank you! Your relentless focus on helping our users, customers and partners makes our success possible. <\/p>

Now, over to Ruth.<\/p>

Ruth Porat, CFO Alphabet and Google: <\/strong>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.<\/p>

For the first quarter, our Consolidated Revenues were $68.0 billion, up 23%, or up 26% in constant currency. Our total cost of revenues was $29.6 billion, up 23%, primarily driven by Other Cost of Revenues, which was $17.6 billion, up 22%. The biggest factors here were: costs associated with data centers and other operations; followed by content acquisition costs, primarily driven by costs for subscription content and then costs for YouTube’s advertising-supported content.<\/p>

Operating expenses were $18.3 billion, up 24%. Headcount growth was the primary driver of expense across all 3 categories: Research & Development, Sales & Marketing and G&A. Growth in Sales & Marketing also reflects an increase in advertising and promo expense as we ramped back from the lower levels of spend last year. <\/p>

Operating income was $20.1 billion, up 22% and our operating margin was 30%. <\/p>

Other Income & Expense, was a loss of $1.2 billion, which was driven by unrealized losses in the value of investments in equity securities given market volatility. <\/p>

Net income was $16.4 billion.<\/p>

We again delivered substantial Free Cash Flow with $15.3 billion in the quarter and $69 billion for the trailing twelve months. We ended the quarter with $134 billion in cash and marketable securities. We repurchased a total of $52 billion of our Class A and Class C shares in the last twelve months.<\/p>

Let me now turn to our segment financial results. Starting with our Google Services segment, total Google Services Revenues were $61.5 billion, up 20%. <\/p>

Google search and other advertising revenues of $39.6 billion in the quarter were up 24%, led again by retail, followed by continued recovery in travel. <\/p>

YouTube advertising revenues of $6.9 billion, were up 14%, reflecting ongoing strong growth in brand and more modest growth in direct response. The deceleration in the year-on-year growth rate primarily reflects lapping of the exceptional performance of direct response that we called out in the first quarter of 2021.<\/p>

Network advertising revenues of $8.2 billion, were up 20%, driven by AdSense and AdMob. <\/p>

Other Revenues were $6.8 billion, up 5%. The growth rate reflects substantial growth in YouTube non-advertising revenues driven by subscriber growth in YouTube Music and Premium and YouTube TV, which were largely offset by a year-on-year decline in Play revenues primarily as a result of the pricing changes that we’ve discussed with you previously. <\/p>

In terms of costs within Google Services, TAC was $12 billion, up 23%. <\/p>

Google Services Operating income was $22.9 billion, up 17%, and the operating margin was 37%.<\/p>

Turning to the Google Cloud segment, revenues were $5.8 billion for the first quarter, up 44%. GCP’s revenue growth was again greater than Cloud’s, reflecting significant growth in both infrastructure and platform services. Strong revenue growth in Google Workspace was driven by solid growth in both seats and average revenue per seat. Google Cloud had an Operating Loss of $931 million.<\/p>

As to our Other Bets, for the first quarter, revenues were $440 million, and the operating loss was $1.2 billion. <\/p>

Let me close with some comments on our outlook.<\/p>

We’re pleased with our strong results in the first quarter, which reflect the benefit of investments we’ve made over many years. We remain committed to investing to continue to build helpful technologies in support of long-term growth, notwithstanding the uncertainty in the global outlook. The most visible reflection of our focus on long-term performance is our continued investment in talent and compute capacity, across the company.<\/p>

In terms of outlook by segment, for Google Services: the revenue growth rates we delivered in 2021 in our advertising businesses benefited from lapping the COVID-related weakness in 2020. Obviously, we will not have that tailwind for the rest of this year. As discussed in prior calls, the largest impact from COVID on our results was in the second quarter of 2020, which means that in the second quarter of 2022 we will face a particularly tough comp as we lap the recovery we had in the second quarter of 2021. Additionally, the second quarter results will continue to reflect that we suspended the vast majority of our commercial activities in Russia.<\/p>

Within Other Revenues, in the first quarter, the substantial growth in YouTube’s subscription revenues was offset by a decline in Play revenues versus the first quarter last year due to the fee changes we previously announced. These fee changes will continue to affect our results throughout 2022 until we lap the introduction of the changes. <\/p>

Turning to Google Cloud: Cloud’s performance in the first quarter reflects growing deal volume and strength across multiple industries and regions. Customers are increasingly choosing Google Cloud to help them digitally transform their businesses using our global infrastructure offerings, our data analytics and AI capabilities, and the collaboration benefits of Workspace. We continue to invest aggressively in Cloud given the sizable market opportunity we see. <\/p>

At the Alphabet level, reported revenues in the first quarter reflect that the U.S. dollar strengthened versus last year – with a 3 point headwind in Q1 compared with a 2 point tailwind in the first quarter of 2021. In the second quarter, the impact from foreign exchange rates will have an even greater impact on year-over-year comparisons given both the larger tailwind last year and the increase we expect in the headwind in Q2 versus Q1, based on current spot rates.<\/p>

With respect to Alphabet headcount, we added 7,400 people in the first quarter and the majority of hires were for technical roles. The biggest increases in headcount this quarter across product areas were again in Cloud, for both technical and sales roles. <\/p>

Turning to Capex, the investment in the first quarter reflects the timing of closing for several large acquisitions of office facilities, which converged in the first quarter. More specifically, of the total, nearly $4 billion covers the purchases in New York, London and Poland that we had mentioned previously.<\/p>

We continue to expect a meaningful increase in Capex in 2022 versus last year. For the balance of 2022, the increase will be particularly reflected in investments in Technical Infrastructure globally, with servers as the largest component. <\/p>

As stated in our press release today, our Board has authorized the repurchase of up to an additional $70 billion of our Class A and Class C shares, in a manner that’s in the best interest of the company and its stockholders.<\/p>

Thank you. And now Sundar, Philipp and I will take your questions.<\/p>

Operator:<\/strong> Thank you. As a reminder, to ask a question, you will need to press star, then one on your telephone. To withdraw your question, please press the pound key. To prevent any background noise, we ask that you please mute your line once your question has been stated. And our first question comes from Brian Nowak from Morgan Stanley. Your line is now open. <\/p>

Brian Nowak, Morgan Stanley: <\/strong>Thanks for taking my question. I have two. The first one, Ruth, I wondered, 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?<\/p>

And then the second one for Philipp. Appreciate all the color around Performance Max. Can you just talk to us a little bit about – strategically about how long we should think about it takes to drive broader adoption of this type of tools with your sales force? Is it months, quarters, years? Where are you in SMB adoption? And how long do you think it takes to get broader and maybe full adoption of a product like that? Thanks.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: Thanks, Brian. So in terms of the Ad business, I would say, as I did in opening comments, we were very pleased with the year-on-year Search revenue growth in the first quarter, up 24%. And it really – it really reflected the strength that we’ve seen in retail, as Philipp and I commented on. I would say – as you’re asking how are we looking forward, I would say, the revenue growth rates that we delivered in 2021 in Search and across our advertising businesses more generally, as I said in opening comments, did benefit from lapping the COVID-related weakness in 2020. So I think one key point is that we’re not going to have that tailwind for the rest of this year. And as I noted, one of the key areas to focus is Q2 of 2020. That was where we had the largest impact from COVID. So that means in the second quarter of 2022, we’re going to face a tough comp, as I said. I would say, in addition, the
second-quarter results are going to continue to reflect that we suspended the vast majority of our commercial activities in Russia. And then I noted the impact of foreign exchange. So as we’re looking at it generally, we feel good about what we’re doing in the business, a couple of key points that I called out there.<\/p>

Philipp Schindler, SVP and CBO, Google<\/strong>: And to your question on Performance Max, which we covered last quarter as well, maybe just a quick recap. It really brings together the best of Google’s automation to help advertisers maximize their reach and efficiency across our channels. Using the same input, we can now serve campaigns on multiple inventory formats, expanding an advertiser’s reach with the same effort. And by the way, just today we announced new features for Performance Max, including new customer acquisition goals, new campaign-level insights, more details about the one-click upgrade tool for Smart Shopping and Local campaigns. So we’re very, very committed to helping Performance Max deliver for our advertisers, and have been very open to advertiser feedback, how we can do this. And specifically on your time axis, I don’t think there’s a material difference to the time axis that we’ve looked at in previous rollouts; as always, focused on generating the maximum value and performance for our advertising partners.<\/p>

Brian Nowak, Morgan Stanley: <\/strong>Great. Thank you both.<\/p>

Operator: <\/strong>Thank you. And our next question comes from Eric Sheridan from Goldman Sachs. Your line is now open.<\/p>

Eric Sheridan, Goldman Sachs: <\/strong>Thanks so much for taking the question. Maybe one follow up to Brian’s question. Other industry players have called out pockets of weakness in brand advertising globally in the quarter that you just reported. Did you see any of that from a volatility standpoint, especially around maybe the war in Ukraine for a period of time in March? <\/p>

And then sticking with all the commentary you gave on YouTube, how should we be thinking about the strategic goals of driving longer engagement and user growth and monetization for YouTube against some of the initiatives you called out? Versus how to think about the performance of the business as we go through ’22, short-form video versus long-form video, or maybe mix of direct-response versus brand advertising. Thanks so much.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> So I’ll start on the first question and -- revenue impact. I think you were 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. In terms of revenues, the most direct impact is the fact that we suspended the vast majority of our commercial activities in Russia, as we announced in early March. And to your question, about 1% of Google revenues were from Russia in 2021, and that was primarily from advertising. In addition, from the outset of the war, there was a pull-back in advertiser spend, particularly on YouTube in Europe. So a couple of impacts from the war. I guess over to Philipp with respect to YouTube and trends there.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>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 four times 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-form 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 received payment from the Shorts Fund in 2021 weren’t in the YouTube Partner Program, just as an interesting number. And then on the advertiser view side, as I mentioned earlier, we’re testing ads on Shorts with products like App Install and Video Action campaigns and are encouraged by the early results. And so all in all, I think we’re deeply committed to supporting the next generation of mobile creators here on YouTube and are very actively working on what monetization could look like in the future.<\/p>

Operator:<\/strong> Thank you. And our next question comes from Doug Anmuth from JP Morgan. Your line is now open.<\/p>

Doug Anmuth, JP Morgan:<\/strong> Thanks for taking the question. I have two. First, just on advertising, just thinking about industry conversations, it seems pretty clear that you’re able to capture some dollars that shifted to Search from social related to Apple’s iOS privacy changes. Just curious if that dynamic continued in 1Q. <\/p>

And then if you can comment at all just how you think about sustainability of those dollars going forward. And then, Ruth, in terms of spending and on the margin side, operating margins continue to be strong at 30%, even with the greater headcount of the past couple quarters. I was hoping you could elaborate a little bit on what you mean by “considered investments” and in what areas are you able to offset and gain more efficiencies in the business? Thanks.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Thanks for the question. So with respect to Search and ATT, there’s really nothing to highlight. We haven’t seen a noticeable shift in spend. <\/p>

And then in terms of overall margins and how we’re thinking about investing, what I tried to make clear is we do continue to plan to invest aggressively this year. You know, I made that point in opening comments with respect to both ongoing hiring at a rapid clip as well as ongoing investment in technical infrastructure. <\/p>

And I would say, in terms of margins, we do remain focused on investing for long-term value creation. And as we noted last year, in 2021, our margins did benefit from substantial revenue growth; while at the same time, expense growth ramped more gradually during the year. And in certain respects, as we talked about last year, margins benefited from what I describe as a bit of a timing difference between revenue growth and expense growth.<\/p>

And there were two other benefits worth calling out that we talked about last year that affected operating margin. The first was the impact from the change in useful lives that we called out last year, and that benefited the year-on-year growth and expenses last year. And the second was the impact of foreign exchange, which was a tailwind last year, but as I noted, has really flipped to a headwind given the strength of the U.S. dollar. And as a reminder, the impact of foreign exchange is greater on operating income than it is on revenue given our expense base is weighted toward the U.S. with most of our R&D efforts located here in the U.S. So the main thing is, the key point, we are very focused on long-term value creation. And in our view, given the opportunities we see, there are some key investments that we are continuing to make.<\/p>

Doug Anmuth, JP Morgan:<\/strong> Thank you. Very helpful.<\/p>

Operator:<\/strong> Thank you. And our next question comes from Justin Post from Bank of America, Merrill Lynch. Your line is now open.<\/p>

Justin Post, Bank of America Merrill Lynch: <\/strong>Great. Thank you. A couple things. First on YouTube, quite a ramp in Shorts activity. Has that been a little bit of a headwind for growth as you ramped that up? And we can try to guess on monetization later. <\/p>

And then secondly, when you think about regulation in Europe, there’s a lot of headlines about the Digital Markets Act and other things. How do you think about the regulatory environment and the evolution over the next couple years? Thank you.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Thanks for the question. So in terms of YouTube, I think there are a couple of questions in your question. In terms of the deceleration in the year-on-year revenue growth rate relative to the first quarter, the largest factor was lapping an exceptionally strong quarter in direct response, as we noted last year. <\/p>

In addition to that direct response lapping, there were a couple of other items worth noting. First, as I’ve already mentioned, the war. That did have an outsized impact on YouTube ads relative to the rest of Google, and that was both from suspending the vast majority of our commercial activities in Russia as well as, as I noted earlier, the related reduction in spend primarily by brand advertisers in Europe.<\/p>

Then in addition, as we mentioned on the third quarter earnings call, we continue to experience a headwind from ATT primarily in direct response. And the dollar impact from ATT has been consistent since it was implemented in April of last year. <\/p>

And then there’s the FX headwind I’ve already commented on. <\/p>

I would say to the other part of your question, we are experiencing a slight headwind to revenue growth as Shorts viewership grows as a percentage of total YouTube time. We are testing monetization on Shorts, and early advertiser feedback and results are encouraging. And the team is focused on closing the gap with traditional YouTube ads over time. So we’re excited about the new opportunities with Shorts, but a slight headwind.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> On the second part of the question about DMA and regulation, look, we support a number of DMA’s goals, including expanded consumer choice, interoperability. Obviously, the implementation details will be important. And we are still – it’s too early to tell, but we’ll be working, as we have done over the past many years, we’ll be engaging constructively, including regulatory dialogue, to understand and make progress.<\/p>

Justin Post, Bank of America Merrill Lynch: <\/strong>Great. Thank you.<\/p>

Operator:<\/strong> Thank you. And our next question comes from Mark Mahaney from Evercore ISI. Your line is now open.<\/p>

Mark Mahaney, Evercore ISI<\/strong>: Okay. I’ll stick, please, with YouTube questions. That kind of brand softness in Western Europe, Ruth, does that look like that has already abated? Does that look like that’s continuing? <\/p>

And if you step back and just look at overall YouTube usage, and I know you’ve mentioned some numbers in the prepared comments, just given the much broader array now, I think, of content options, including in short-form video and long-form video, are you seeing the overall growth – any impact on the overall growth in YouTube users or in engagement per YouTube user? Thank you.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> 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. <\/p>

And then overall in terms of YouTube and engagement, I noted on both YouTube’s advertising business as well as the subscription businesses that the performance there, I’d say, over the past few years, we’ve seen significant investment in online video. There’s been a ton of innovation. We think innovation is positive. Broadly, we continue to benefit from the fact that there are 2 billion logged-in viewers who visit YouTube every single month. And people are creating – comment – content on YouTube at a very active rate. We’re really pleased with what we see there. And our team does remain focused on innovating and helping creators grow. You know, as Sundar said, Shorts now has 30 billion daily views. That’s four times higher than a year
ago. And I think that really goes to your question about the level of activity that we’re seeing.<\/p>

Mark Mahaney, Evercore ISI: <\/strong>Okay. Thank you.<\/p>

Operator<\/strong>: Thank you. And our next question comes from Michael Nathanson from MoffettNathanson. Your line is now open.<\/p>

Michael Nathanson, MoffettNathanson:<\/strong> Thanks. I have one on YouTube, of course, and then one for Ruth. On YouTube, I think what we’re hearing is that there’s an emerging concern that TikTok is a competitor to YouTube’s mobile position. And I know you call out the strength of Shorts, but if you talk big-picture, are you seeing any meaningful shift in consumer demand for the mobile YouTube product? And any type of advertising, maybe, shift on mobile because of TikTok?<\/p>

And then to Ruth, it’s an odd quarter because when you look at APAC, the APAC region underperformed EMEA, which had Russia and Ukraine in there. Is there anything you want to call out about Asia Pacific this quarter, you know, why it could have been softer? Or any other product that may have led to a bit of a slower quarter for APAC? Thanks.<\/p>

Philipp Schindler, SVP and CBO, Google<\/strong>: Look, maybe I start on the first part of your question. It’s very similar to what Ruth said before. 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 in trying to help creators grow, trying to innovate. And just to give you a number, in 2021, the number of YouTube channels that had made at least $10,000 in revenue was up more than 40% year over year. And we’re heavily investing in Shorts and the Connected TV and Shopping. You heard the stats from Sundar on the 30 billion daily views. So we continue to invest. And new monetization options for creators beyond ads are a big part of what we’re doing. And as I said before, we’re testing ads on Shorts and are encouraged by initial results.<\/p>

Ruth Porat, CFO Alphabet and Google: <\/strong>Yeah, 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. I guess to the heart of your question with respect to APAC, the main thing there is to take you back to a year ago. We were lapping a substantial 39% growth rate in constant currency. And so this really reflects lapping that sizable growth relative to more muted ads performance in APAC this first quarter, and it really takes you just back to last quarter. In Other Americas, it was much more about the FX headwind more than
anything else.<\/p>

Michael Nathanson, MoffettNathanson: <\/strong>Thanks, Ruth.<\/p>

Operator:<\/strong> Thank you. And our next question comes from Brent Thill from Jefferies. Your line is now open.<\/p>

Brent Thill, Jefferies<\/strong>: Good afternoon. For Sundar, just on Google Cloud, if you could just walk through the next leg of growth, where you’re most excited for the rest of ’22. Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thanks. Look, overall, across the board, I’m excited because you saw in my earlier remarks, there is a lot of product innovation across the key areas, be it data analytics, cybersecurity, our open multi-cloud, as well as Google Workspace. So when I look at the innovation and the product pipeline and the overall demand we are seeing in 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. But overall, the execution has been great. We are scaling up, particularly in our go-to-market as well. And I think that will play out well. And over time, as we focus on converting bookings to consumption as well, I think -- I think it will play out well, taking a long-run view and methodically scaling up and executing better. So that’s what I’m excited about.<\/p>

Brent Thill, Jefferies:<\/strong> Thank you.<\/p>

Operator:<\/strong> Thank you. And our next question comes from Stephen Ju from Credit Suisse. Your line is now open.<\/p>

Stephen Ju, Credit Suisse:<\/strong> Okay, thank you. So, Sundar, I think your Search team recently released a blog posting talking about the desire to help your users out with their management of money. I think we talked about some of this last time with the rollout of Tez in India and the evolution to Google Pay. But can you talk about your ambitions to add more utility to the service so that it becomes a more, hopefully, indispensable service for your user base? And particularly as you hope that this theoretically becomes your next billion-user product. Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Stephen. Obviously we’ve been focused on making sure payments works well. One way you can step back and think about it is there are payment strategies very similar to the strategy we have for commerce overall. We want to make all of this work easier, both on the merchant and financial institution side and making sure they can connect with customers as 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. And to your questions about making — first of all, we are making sure it works across the board, works well, easy to use for all the sites. And then over time, we will innovate and build new digital experiences. Simple examples you saw was we rolled out the ability for users to pay for parking on Google Pay with their voice just using Google Assistant. So, really, building for scale, building for simplicity; and then over time, we will layer on additional helpful features. But we are definitely focused on the first part now, making sure it works well for as many users across the world.<\/p>

Stephen Ju, Credit Suisse:<\/strong> Thank you.<\/p>

Operator: <\/strong>Thank you. And our last question comes from the line of Dan Salmon from BMO. Your line is now open.<\/p>

Dan Salmon, BMO Capital Markets:<\/strong> Good. Good afternoon, everyone. I have two 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 been 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?<\/p>

And then second, one last one on YouTube. You mentioned the strong performance in subscriptions, Ruth. Any products that you would highlight that are driving that strength in particular? Thanks.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>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 – yeah, this is a nice one. We like it.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: And then in terms of the subscription businesses, as I said, they continue to deliver substantial revenue growth, and that was driven by subscriber growth for both YouTube TV as well as YouTube Music and Premium. So pleased with what we’re seeing there.<\/p>

Dan Salmon, BMO Capital Markets<\/strong>: Okay, thank you.<\/p>

Operator:<\/strong> 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.<\/p>

Jim Friedland, Director of Investor Relations:<\/strong> Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2022 call. Thank you and have a good evening.<\/p>

Operator:<\/strong> Thank you. This concludes today’s conference call. Thank you for participating, and you may now disconnect.<\/p>

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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.
<\/strong><\/p>

Operator:<\/strong> Welcome everyone. And thank you for standing by for the Alphabet Inc. second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during that session, you will need to press *11 on your telephone. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thank you. Good afternoon, everyone, and welcome to Alphabet’s second quarter 2022 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat. Now I’ll quickly cover the Safe Harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such 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 most recent Form 10-K filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.
And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thank you, Jim, and good afternoon, everyone. <\/p>

I’m proud of how our teams continue to build helpful products and experiences for people and partners. Reflecting this, our performance in Search in the second quarter was strong. We’re also seeing momentum in Cloud. <\/p>

With an uncertain global economic outlook, our strategy to invest in deep technology and computer science to build helpful products for the long-term, is the right one.<\/p>

Our ability to take the long view stems from our timeless mission: to organize the world’s information and make it universally accessible and useful. At Google I\/O in May, I talked about two key ways we move that mission forward: advancing both knowledge and computing. <\/p>

Those goals are at the heart of what we do. We know that our services are particularly helpful to people and businesses during uncertain moments -- whether it’s using Search or YouTube to find anything from anywhere. Or highly efficient tools like Search Ads that help businesses of all sizes reach customers. Or Google Cloud, which helps companies adapt to hybrid work and find efficiencies. <\/p>

We will continue to invest in areas like AI, Search and Cloud. And we’ll do it responsibly and in a way that is responsive to the current environment. Earlier this month, I announced that we’ll be slowing our hiring and sharpening our focus as a company. We’re focused on hiring engineering, technical and other critical roles. And we’re working to improve productivity and ensure that the great talent we do hire is aligned with our long-term priorities.<\/p>

Turning now to product highlights. Years ago, we made a big bet on AI. We believed that it would be transformational for our business and for the world. We’re still in the early days, yet AI already underpins many of our most helpful products and services. For example, AI is helping us create entirely new ways to Search. People are using Google Lens to do visual searches more than 8 billion times per month. A new feature called Multisearch helps people find what they need using words and images at the same time. Later this year, Multisearch will be able to help people find local results near them. AI is also helping improve translation. With a new, monolingual approach to translation, we’ve added twenty-four new languages to Google Translate, spoken by three hundred million people. And a new immersive view in Maps uses computer vision, AI and billions of images to create high-fidelity representations of places around the world.<\/p>

Beyond AI, we’re also seeing a new frontier with augmented reality. We’ve been testing exciting prototypes in our labs, like the device we shared at I\/O that puts real-time translation and transcription in your line of sight. It’s one example of how AR can solve real needs in the real world. And last week, we announced that we’ll soon begin early testing of AR prototypes in real world scenarios. Our goal is to learn how they can help people in their everyday lives.<\/p>

Our investments in commerce are another way we deliver helpful experiences. People are shopping across Google more than a billion times each day. We see hundreds of millions of shopping searches on Google Images each month. Merchants will soon be able to submit 3-D images of their products to appear directly on Google Search, so customers can try before they buy.<\/p>

We’re also focused on bringing together hardware, software and AI in a range of helpful devices. At I\/O, we announced great new products including Pixel 6a, Pixel Buds Pro and Pixel Watch. We’re currently taking pre-orders for Pixel 6a and Pixel Buds Pro. It’s been great to see the positive feedback so far. And on platforms, I’m proud that Android remains the world’s most popular operating system, with more than 3 billion monthly active devices worldwide. Last year alone, consumers activated 1 billion Android phones. We’re making it easier for Android users to share photos and communicate with friends and family, with a modern messaging standard called Rich Communication Services, or RCS.<\/p>

Across our platforms and beyond, we keep more people safe online than anyone else in the world. Safe Browsing on Chrome Browsers helps protect billions of people every day, by warning them when they try to access dangerous sites or files. Earlier this year, we rolled out a new machine learning model that identifies more than twice as many potentially malicious sites and phishing attacks as the previous model – helping to contribute to a safer and more secure web. We’ve also unified our password managers across Chrome and Android. Now, stored passwords can be grouped and protected across devices, apps and the web. <\/p>

Taking a closer look at YouTube: YouTube Shorts are watched by over 1.5 billion signed-in users every month, with more than 30 billion daily views. In Q2, YouTube TV surpassed 5 million subscribers, including trialers. There’s also a lot of potential for shopping on YouTube. Just last week we announced a partnership with Shopify. It will help creators easily connect their stores to YouTube and enable shopping across their livestreams and videos. There’s more to come
here.<\/p>

Moving on to Cloud, which surpassed the $6 billion quarterly revenue mark for the first time. Q2 revenue grew to $6.3 billion with momentum across Google Cloud Platform and Workspace. We saw continued demand in all geographies, with global brands like Target in North America, H&M Group in Europe, Banco BV in Latin America, and Bio Farma in Asia. <\/p>

We launched Google Public Sector in June, expanding our commitment to help U.S. government agencies and public institutions accelerate their digital transformations, from New York State and Arizona State University to the U.S. Forest Service and the State of Rhode Island. Customers are choosing Google Cloud as their technology partner because of our leadership in four areas:<\/p>

First, we continue to lead in the Data Cloud market, because we unify data lakes, data warehouses, data governance, and advanced machine learning into a single platform that can analyze data across any Cloud. Companies like SC Johnson, Northwell Health and the Golden State Warriors chose Google Cloud for our strength in data analytics. Our capabilities helped SWISS Air optimize its flight operations. They are also helping Engie explore ways to optimize wind energy management, and Ford to create smarter factory floors. Second, companies like Beta Bank and Mayo Clinic choose our open Cloud infrastructure to modernize their IT systems – on our Cloud, at the edge, or in their data centers.<\/p>

Our infrastructure scales to help customers like Deutsche Telekom modernize its network, Wipro to modernize its core systems, and Garvan Institute of Medical Research to process 14,000 genomes in under two weeks. Our multicloud strategy remains a differentiator for customers like Elevance Health, formerly known as Anthem, and AMD.<\/p>

Third, cybersecurity. Google has always provided a secure cloud infrastructure. And we continue to introduce new cybersecurity products that help customers detect, protect, and respond to a broad range of cybersecurity threats. <\/p>

Customers like GitLab, Highmark Health, and Iron Mountain protect their critical systems and data with our products. Caribou Coffee and Etsy are among the 5 million websites protected by
our cybersecurity technology.<\/p>

Finally, Google Workspace’s easy-to-use and secure communication and collaboration tools continue to be chosen by many organizations as they return to hybrid work. <\/p>

Google Workspace helped St. Luke’s Medical Center, a leading healthcare system in the Philippines, address a 38% increase in telehealth visits during the pandemic. <\/p>

Results like this are driving growth in many customer segments around the world, including
digital natives, like Canva, large enterprises like Travis Perkins PLC, and public sector institutions, including the Central Dutch Government.<\/p>

Finally, our Other Bets. Waymo expanded rider-only testing with employees to include Downtown Phoenix, and started testing at Phoenix’s Sky Harbor airport. It also began charging Trusted Tester riders in San Francisco, a step closer to launching a commercial service with fully autonomous trips. Waymo also opened a new facility to support Waymo Via, their autonomous class 8 trucking solution, as they continue to increase their operations and investment across the Southwest region. Calico is testing an investigational drug treatment in patients with ALS, developed in collaboration with AbbVie. It’s an early step of many in the development process.<\/p>

Wing recently surpassed two hundred and fifty thousand commercial deliveries and unveiled a series of delivery drone prototypes able to carry different sized packages. There’s good progress here and we’ll continue to be intentional across the portfolio.<\/p>

To close, while the economic outlook is uncertain, it’s been great to see people gathering in person again. We’re pleased to see people coming back into the office more often, resulting in more opportunities for collaboration. It’s a privilege to build technology that is helpful in both good times and uncertain ones, and I want to thank everyone at Alphabet and Google for their work in support of people, businesses, and all of our partners everywhere. Over to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar, and hi everyone, it’s always great to be with you all.<\/p>

As Sundar indicated, we’re as focused as ever on helping businesses navigate complexity and operate from a position of confidence. AI-powered tools, insights and automation are arming customers and partners with the ability to stay agile and responsive - so they can capture short-term opportunities while also building for the long-term.<\/p>

You’ve seen our own commitment to the long-term in our latest innovation announcements at I\/O, Google Marketing Live, and Brandcast. Sundar covered a number of these. I’ll dive deeper into a few more - including how we’re improving our advertising experiences and building simpler, more useful products for our partners. <\/p>

Within Google Services, Search delivered strong revenue growth in the second quarter, driven by performance in both Travel and Retail.<\/p>

In Travel, users’ appetite continued to remain strong heading into the summer season. Searches for “places to visit in summer” were up 2X globally year-over-year while searches for “last minute hotel deals” were up 50%. However, as we’ve all seen in the news recently, the travel sector has been experiencing some challenges. As always, we’re committed to helping our travel partners navigate this with insights and new tools.<\/p>

Then, there’s Retail - where we had another solid quarter. At GML, we highlighted how we’re continuing to innovate to help merchants make the most of how quickly consumer shopping is evolving.<\/p>

Like Best Buy - who’s embracing a full omnichannel approach - from measurement to bidding to using omni-ad formats across Google. By adopting omni across its Local Inventory Ads portfolio and showcasing curbside and in-store pick-up, Best Buy increased in-store revenue from Google Ads by 34% last year.<\/p>

Today’s customers expect to shop wherever, whenever - and they care as much about local as they do about finding inspiration for their next purchase online. In Q2, searches for “open now near me” were up 8X globally YoY, while searches for “designer outlet” jumped 90%. We also saw strong interest in apparel categories like women’s clothing and in beauty categories like perfume and fragrances.<\/p>

With AI-powered tools like Performance Max - which Local and Smart Shopping campaigns will upgrade to in time for the holidays - we’re helping businesses move at speed and scale to reach new and existing customers wherever they are in their shopping journey with relevant, useful content. We’ve seen strong momentum with PMax - advertiser adoption is up 5X YTD.<\/p>

Sustainable apparel brand Rothy’s drove a 59% increase in conversions and 60% increase in revenue after turning to PMax. By leveraging its creative assets and showing them at scale, Rothy’s reached more customers in a way it hadn’t been able to do before. <\/p>

Innovating across Search and YouTube also remain top priorities. Sundar mentioned new 3D AR features - Target and Wayfair are testing these to help customers see and shop products in real-life.<\/p>

We launched new ad formats for our more visual “browsy” search experience. And then there’s cool live commerce capabilities like live directs which let creators start a shopping livestream on their channel and then redirect viewers to a brand’s channel for more. <\/p>

Let’s dive deeper into YouTube. In the second quarter, the biggest factor in the year-over-year comparison was the lapping of a very strong second quarter in 2021, when we experienced a strong recovery from the impact of COVID in early 2020. Ruth will provide more details on this
later on.<\/p>

As we continue to help advertisers manage through uncertainty, I would point out three key highlights for YouTube: <\/p>

First, Brandcast joined the Upfronts in New York in May for the first time ever - a reflection of how digital and linear TV worlds are converging for both viewers and advertisers. As the #1 streaming video platform to reach viewers across all devices, with billions of hours of video watched every day, YouTube remains well positioned to deliver the reach, results, and relevance that advertisers need.<\/p>

In fact, even in TV’s biggest moments, YouTube is still delivering huge incremental reach - according to Comscore, 49.9% of adults that saw a Super Bowl ad on YouTube on the day of the Super Bowl did not see the ad on TV. <\/p>

And as more advertisers tap into connected TV, they’re also driving results. According to a Google-commissioned Nielsen meta-analysis of MMMs that measured YouTube CTV and TV across U.S. consumer packaged goods, on average, YouTube CTV effectiveness was 3.1 times greater than TV. <\/p>

Take GSK Consumer Healthcare - now Haleon - who piloted CTV campaigns across its top 10 global markets to drive effectiveness at scale and tap into the shift to streaming. The results? 73% of campaigns drove substantial lift in brand and unbranded searches and viewers were up to 14X more likely to search for Haleon-related terms. Adding CTV to its existing plans also led to greater efficiencies and savings. Haleon has since upped its 2022\/2023 investment - and is now expanding CTV across LATAM and EMEA markets. <\/p>

Second, as Sundar said, our momentum in Shorts continues. Last quarter we shared that we’re in the early stages of testing monetization with ads and we continue to be encouraged by the
results so far.<\/p>

Third, there’s full-funnel - which we’ve covered before - and more advertisers are embracing. On average, YouTube advertisers using a full-funnel strategy experienced 80% unique reach across Brand and Action campaigns. With this incremental reach across upper and lower funnel formats, advertisers meet different audiences based on where they are in the purchase journey.<\/p>

Estee Lauder Taiwan’s recent campaign for its Advanced Night Repair Serum is a great example. Branded content collaboration with top creators raised awareness, while YouTube’s Shopping shelf feature boosted consideration. And to generate new leads and sales, a series of well-orchestrated action formats did the trick. This full-funnel strategy drove 29% more unique visits to its website and a 95% increase in sales.<\/p>

With our performance products, advertisers can convert demand; with our massive reach products, they create net new demand at scale.<\/p>

Lastly - an update on how we’re bringing the best across Google to our partners and key ecosystems.<\/p>

First, in Gaming, to help Bandai Namco Entertainment drive immersive gaming experiences and build a more robust IP strategy, we’re partnering across Cloud, Geo, Ads, YouTube and more.<\/p>

And then, there’s News. Google News Showcase now has 1,500-plus partnerships with publications across 17 countries - including recent agreements with publications in the UK, Romania and Slovakia.<\/p>

I’ll close as I always do: with gratitude for our customers and partners - and for Googlers - across sales, partnerships, product, engineering, and our many, many support teams. Thank you for your tireless commitment to making a positive impact around the world. <\/p>

Ruth, over to you.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Thank you, Philipp.<\/p>

Our financial results for the second quarter reflect strength in Search and momentum in Cloud.<\/p>

My comments will be on year-over-year comparisons for the second quarter, unless I state otherwise.<\/p>

I will start with results at the Alphabet level, followed by segment results, and conclude with our outlook. <\/p>

For the second quarter, our Consolidated Revenues were $69.7 billion, up 13%, or up 16% in constant currency. <\/p>

Our total cost of revenues was $30.1 billion, up 15%, primarily driven by Other Cost of Revenues, which was $17.9 billion, up 17%. The biggest factor here was costs associated with data centers and other operations. <\/p>

Operating expenses were $20.1 billion, up 24%, reflecting the following. <\/p>

First, the increase in R&D expenses, which was driven primarily by headcount growth.<\/p>

Second, the growth in Sales & Marketing expenses, which was driven primarily by increased spending on ads & promo, followed by headcount growth. <\/p>

And finally, the growth in G&A, which reflects increases in both professional service fees and in headcount, partially offset by a decline in charges related to legal matters. <\/p>

Operating income was $19.5 billion, flat versus last year, and our operating margin was 28%. <\/p>

Other Income & Expense was a loss of $439 million. <\/p>

Net income was $16.0 billion.<\/p>

We delivered Free Cash Flow of $12.6 billion in the quarter and $65 billion for the trailing 12 months. We ended the quarter with $125 billion in cash and marketable securities. <\/p>

Let me now turn to our segment financial results.<\/p>

Starting with our Google Services segment, total Google Services Revenues were $62.8 billion, up 10%.<\/p>

Google Search and other advertising revenues of $40.7 billion in the quarter were up 14%, driven by both Travel and Retail.<\/p>

YouTube advertising revenues of $7.3 billion were up 5%. The modest year-on-year growth rate primarily reflects lapping the uniquely strong performance in the second quarter of 2021. <\/p>

Network advertising revenues of $8.3 billion were up 9%, driven by AdSense.<\/p>

The quarter-on-quarter deceleration in both YouTube and Network advertising revenues primarily reflects pullbacks in spend by some advertisers. <\/p>

Other Revenues were $6.6 billion, down 1%, reflecting a year-on-year decline in Play, primarily driven by the fee changes we have discussed previously. We also saw a slowdown in buyer spend due to a number of factors, including lower engagement levels compared with earlier stages of the pandemic. <\/p>

In terms of costs within Google Services, TAC was $12.2 billion, up 12%. <\/p>

Google Services Operating income was $22.8 billion, up 2%, and the operating margin was 36%.<\/p>

Turning to the Google Cloud segment, revenues were $6.3 billion for the second quarter, up 36%. <\/p>

GCP’s revenue growth was again greater than Cloud’s, reflecting significant growth in both infrastructure and platform services. <\/p>

Strong revenue growth in Google Workspace was driven by solid growth in both seats and average revenue per seat. <\/p>

Google Cloud had an Operating Loss of $858 million. <\/p>

As to our Other Bets, for the second quarter, revenues were $193 million and the Operating Loss was $1.7 billion.<\/p>

Let me close with some comments on our outlook.<\/p>

In terms of the Google Services segment, we are pleased with our performance in Search in the second quarter, which continued to deliver strong results. <\/p>

As a reminder, the 2022 revenue growth rates are presented against particularly tough comps as we lapped the recovery in the second quarter of 2021 from the impact of the pandemic in early 2020. <\/p>

Going forward, the very strong revenue performance last year continues to create tough comps that will weigh on year-on-year growth rates of advertising revenues for the remainder of the year.<\/p>

In YouTube and Network, the pullbacks in spend by some advertisers in the second quarter reflects uncertainty about a number of factors that are challenging to disaggregate. <\/p>

Within Other Revenues, in the third quarter, we expect an ongoing headwind from the fee changes and the slowdown in buyer spend that impacted results in the second quarter.<\/p>

Turning to Google Cloud, customers are transforming their businesses utilizing GCP’s secure infrastructure with Data, Analytics and AI capabilities, uncovering real-time insights and leveraging the collaborative tools of Workspace.<\/p>

They are in the early days of this transformation, and we continue to invest in our products, go-to-market capabilities and cloud regions.<\/p>

In terms of foreign exchange, our second quarter results reflect that the U.S. dollar strengthened versus last year, from a significant tailwind last year to a 3.7 percentage point headwind in 2Q. <\/p>

Looking to the third quarter, based on strengthening of the U.S. dollar quarter to date, we expect an even larger headwind from foreign exchange.<\/p>

As a reminder, all segment revenues are reported on a GAAP basis. We provide fixed FX revenues only at the consolidated level and by geographic region. <\/p>

In addition, as we’ve said previously, the impact of foreign exchange is greater on operating income than it is on revenues, given that our expense base is weighted more toward the U.S., with most of our R&D efforts located here.<\/p>

With respect to Alphabet headcount, we added 10,108 people in the second quarter, with the majority of hires for technical roles.<\/p>

Given the uncertain global economic outlook and the hiring progress achieved to date, as Sundar previously announced, we intend to slow the pace of hiring. We expect our actions on hiring to become more apparent in 2023. Our headcount additions in the third quarter will reflect we already have a strong number of commitments, including new graduate hires. As a reminder, we also expect the acquisition of Mandiant to close by the end of the year, which will further increase headcount on top of hiring. Although we expect the pace of headcount growth to moderate next year, we will continue hiring for critical roles, particularly focused on top engineering and technical talent.<\/p>

Turning to capex, the largest investments in the second quarter were in servers, followed by data centers and office facilities. After several large transactions closed in the first quarter, investment in office facilities was once again focused on fit-outs and ground-up construction on existing projects.<\/p>

We continue to expect an increase in capex in 2022 versus last year. For the balance of 2022, the increase will be particularly reflected in investments in Technical Infrastructure globally, with servers as the largest component.<\/p>

Thank you. Sundar, Philipp and I will now take your questions.<\/p>

Operator:<\/strong> Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated. And our first question comes from the line of Douglas Anmuth from J.P. Morgan. One moment. I apologize. One moment while we open the line. Please stand by. And, Doug, your line is now open.<\/p>

Doug Anmuth, J.P. Morgan<\/strong>: Great. Thank you. Hopefully you can hear me. I want to ask two questions. First, Sundar, just in your letter, you talked about how the economic challenges will serve as an opportunity for Alphabet to deepen its focus and invest for the long-term. I just wanted to get a sense of how that might change the investment profile and the areas of priority for the company.<\/p>

And then, Ruth, I was hoping you could provide some color, perhaps, on how growth trended more through the second quarter, and if you have any comments on what you’re seeing so far in 3Q in July. Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Doug. You know, as I said to the company, I think it’s a good time to sharpen our focus. Personally, I find moments like these clarifying. It’s a chance to digest and make sure we are working on the right things as a company with – taking a long-term view, making sure we are continuing to invest in deep technology and computer science and doing differentiated work; and gives a chance to assess everything we’re doing with a critical lens; and reallocate resources to our most critical priorities.<\/p>

So it’s a constraint optimization problem. I think it gives us a chance, given a few years of strong growth, to double down and focus, and we’re going to be very disciplined in terms of how we will approach it. But our focus on the long-term areas, be it AI, be it Cloud and other critical areas will continue.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: In terms of your second question, I’m going to leave the modeling to you. Just a bit of context. Sundar and I, I think Philipp as well, used the term “uncertainty” because we do think that’s the best way to characterize what we’re seeing. The data are complicated. Our results have reflected lapping; continue to reflect lapping of the significant growth rates last year. On top of that, there’s uncertainty in the global economic environment. And then there are issues that differ across industry. You’ve seen it in the news. For some it’s supply chain. For some it’s inventory issues. So we will leave the forecasting to you, and tried to give you sort of the components as we went through Q2 here.<\/p>

Doug Anmuth, JP Morgan:<\/strong> Thank you both.<\/p>

Operator: <\/strong>Thank you. And our next question comes from the line of Brian Nowak from Morgan Stanley.<\/p>

Brian Nowak, Morgan Stanley: <\/strong>Thanks for taking my question. Can you hear me okay?<\/p>

Operator:<\/strong> Brian.<\/p>

Brian Nowak, Morgan Stanley:<\/strong> Can you hear me okay? Hello?<\/p>

Operator: <\/strong>Yes, your line is open.<\/p>

Brian Nowak, Morgan Stanley:<\/strong> Great. Thanks for taking my question. Sundar, I just wanted to follow up on the last question a little bit. I think the tone around investment for the year changed somewhat over the course of the last few weeks. We have kind of gone through July and heard about slowing of hiring, and now a reported hiring pause.<\/p>

You mentioned, just recently, you’re finding moments like these to sort of optimize spend. Can you just talk to – what are you seeing in your business specifically on the advertising side or the Cloud side that is sort of saying – now is when we really do need to make sure we’re optimizing? Are you seeing pull-backs? Or is it more sort of just you’re seeing the macro-economic headlines and wanting to get ahead of it?<\/p>

Sundar Pichai, CEO Alphabet and Google<\/strong>: Thanks, Brian. I think Ruth gave color on what we are talking about as uncertainty. I think -- I think we see that as well. All of us are reacting to quite -- 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, but there is some commonality to it in terms of the macro environment. <\/p>

So this is definitely something we are looking at and want to be more disciplined as we go forward. So that’s the higher-level theme. I think in terms of underlying areas, pretty much I’m focusing my time on – what are the right set of things to do with the longer-term view. And I do think as a company, you know, when you’re in growth mode, it’s tough to always take the time to do all the readjustments you need to do, and moments like this gives us a chance. So I view it as an opportunity. And so some of the sharpening our focus is taking advantage of the moment.<\/p>

Brian Nowak, Morgan Stanley:<\/strong> Great, thank you.<\/p>

Operator:<\/strong> Thank you. And our next question comes from Eric Sheridan from Goldman Sachs.<\/p>

Eric Sheridan, Goldman Sachs:<\/strong> Thanks so much for taking the question. Maybe I can ask a two-parter on YouTube. You have 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? <\/p>

And then when you look at the broader competitive landscape for video, how do you think about positioning YouTube short-form video versus long-form video, or enabling creators and businesses to have tools to build their businesses within YouTube? How do you think about product development and aligning the product against the broader competitive landscape? Thanks so much.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: Thanks, Eric. There was a lot in your question, so maybe I’ll start and then I’ll pass it to Philipp. An obvious point was we’re pointing out the lapping of what truly were extraordinary growth rates. Time will get us through the lapping. So that’s obvious math, but you asked the question, so starting with that.<\/p>

And then I did note that we have seen pullbacks in spend by some advertisers. That, in fact, was the biggest factor in the quarter-on-quarter change, the sequential decline in the growth rate. And we do view that as rather idiosyncratic. Like I said, some of it’s supply chain; some of it’s inventory. And so just working through that.<\/p>

And then I would say there were a couple of other, you know, factors that were relevant. The war was a modest headwind to year-on-year and sequential growth. <\/p>

ATT impact, in fact, remained relatively constant. We’ve said that for the last couple of quarters, so that does remain a headwind. So we’re working through those. <\/p>

But, again, it goes really to continuing to invest in YouTube and the experiences and the opportunity to deliver for our entire ecosystem, users, creators. And why don’t I pass it to Philipp to maybe take you a step deeper into those.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yes, thank you. So despite the pullback from some advertisers, we really believe YouTube remains well-positioned to benefit from the shift to digital video. <\/p>

Maybe first on brand, it’s worth calling out that this was our first year participating in the Upfronts, which is really exciting and really a testament to YouTube’s evolution. And we were very pleased with our strong growth in Upfront commitments. Customers tell us they see value in YouTube’s reach and the ability to drive results. I talked about CTV earlier and as well on our last call, and we’re very excited about the roadmap here. We’re also continuing to give advertisers unique and creative storytelling opportunities and the ability to lean into very precise KPIs, and we recently rolled out some very critical measurement tools.<\/p>

On the direct response side, we still think there’s a lot of runway to address commercial intent on YouTube, between video action campaigns and app campaigns and product feeds and new Live Commerce features. <\/p>

We’re testing a number of different things across Live Commerce. We’re excited about the opportunities here, especially to connect brands with creators. <\/p>

We’re also seeing advertisers buy YouTube at both ends of the funnel, which I talked about earlier, giving advertisers the ability to drive reach and relevance, and action is really where YouTube excels.<\/p>

So the big picture – long term – remain very encouraged by the opportunity for innovation in brand and DR and across YouTube.<\/p>

And I can also briefly touch on the Shorts piece. Consumers are increasingly consuming short-form videos, obviously. We’re seeing this across multiple platforms, including YouTube. Sundar noted earlier that Shorts are being watched by 1.5 billion+ logged-in users every month.<\/p>

So overall, we are continuing to see good user engagement on YouTube. And last quarter we shared that over the past two years, YouTube has seen significant growth in watchtime. And even as people have returned to in-person activities, time spent on YouTube globally has continued to grow.<\/p>

And as I said before, early results in Shorts monetization are also encouraging, and we’re excited about the opportunities here.<\/p>

Operator: <\/strong>Thank you. And our next question comes from Michael Nathanson from MoffettNathanson.<\/p>

Michael Nathanson, MoffettNathanson:<\/strong> Can I ask one of Ruth and Sundar, and then one of Philipp.<\/p>

For 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 sharpening your focus? What’s driving your decision-making? Is there an optimal margin you are looking to seek to? Or cash generation? I’m just trying to get -- you know, when you say these things, I know what other companies have to do because they’re pressured on balance sheets or profitability. So what is the mathematical formula that you are looking for, that you’re driving towards? <\/p>

And then to Philipp, I think people are wondering -- and this is a big question, but the composition of the ad base. And I think people worry that some other companies may really have benefited from a lot of growth in younger, newer companies that were not profitable. Can you talk a bit about what you’re seeing in terms of mix of your composition? Is there any shift maybe towards Fortune 500 companies that are spending more from a healthier maybe starting base? Or anything you can tell us around composition of your ad base. I know it’s a huge question, but that would be helpful. Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google<\/strong>: Maybe one thing I will say, through moments like this, look, I think for a few years we’ve been talking about, particularly in our newer areas, the focus on building sustainable value. <\/p>

And so for me, it’s a long-term framework. We are obviously -- we have areas where we have been doing this for a long time, like Search and so on.<\/p>

But there are newer areas, and we definitely want to make sure while we are investing for the long term, we are thinking through the business model, the value creation and profitability over time. And so all of that are the frameworks we use. <\/p>

And I think it’s important, regardless of the health of your balance sheet, on an area-by-area, everything you’re building is sustainable on its own and you’re very disciplined. And so I think times like this gives us a chance to bring more focus and spend more time on -- with that lens.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: I’d just add, we talked about this last year. Some of the operating margin upside last year was due to timing issues with the surge 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. And so in part, you’re seeing some of that. <\/p>

But very much to Sundar’s point, the way we look at it is we are continuing to invest in long-term growth. That has paid wonderful dividends for users and investors over the years. And we want to make sure we’re doing it responsibly and judiciously. Some of these things pay out over the medium and longer term. <\/p>

And so as he said a couple times now, this notion of wanting to look at what are meaningful investments to deliver continued extraordinary experiences for servers [sic] and users that then supports longer-term growth, it requires investments. And we just want to make sure that we’re getting that balance right and that we’re using resources effectively where we can to redeploy it and put it back into long-term investments. And so it’s that sort of balancing act.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Look, when it comes to the second part of your question, we have a very, very broad base of customers: large, small, different verticals, different sectors and different geographies across the world. We’re very proud to serve such a large base with such a diversity of different players. <\/p>

It’s a broad question you are asking. If you are leaning a little bit more towards the total addressable market here, let me reiterate what I said before. We’re not just addressing above-the-line marketing budgets, like traditional advertising or television advertising. There’s a lot of upside that we see in below-the-line budgets, whether it’s promotional pricing, product placement, sponsorships and so on. And it obviously cuts across the universe of different players, sectors, verticals that I just described.<\/p>

But in the end, our main goal is on delivering great experiences for our users and driving incremental ROI for our advertisers and then making them successful across all this big universe of sectors I just talked about. And I’m positive that budgets should continue to move our way as long as we stay focused on this one.<\/p>

Operator: <\/strong>Thank you. And our next question comes from Justin Post from Bank of America Merrill Lynch.<\/p>

Justin Post, Bank of America Merrill Lynch: <\/strong>Great. Thank you. I hope you can hear me okay. Wanted to ask about Cloud. You mentioned several times Cloud momentum. And I know it was a very tough year-over-year comp, but growth did slow. Wondering if you are seeing any
pull-back in new lift-and-shift projects or other new client adds, or if you are seeing a little slowdown in volumes at all?<\/p>

And then on the margins, is there any urgency to move margins towards breakeven? Or is it still kind of investment mode here with a lot of different products and services to build? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> On Cloud, we continue to see strong momentum, substantial market opportunity here, and still feels like early stages of this transformation. Constantly in conversations with customers, big and small, who are just undertaking the journey. So kind of shows you the opportunity ahead. <\/p>

I would just say nothing -- nothing noticeable, other than given we are in different geographies and different sectors, you do see a varying mix of some customers impacted in terms of their ability to spend. Some customers just slightly taking longer times. And maybe in some cases, thinking about the term for which they’re booking and so on. But I don’t necessarily view it as a longer-term trend as much as working through the macro uncertainty everyone is dealing with.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: And then in terms of your margin question, our view continues to be that this is an extraordinary opportunity. It’s a long-term opportunity, and enterprise customers are still early in their move to the cloud. And so we do very much have that debate. That same question that you posed is the right one, which it’s a trade-off as between revenue growth and immediate profitability. And what we’re focused on is ensuring that we are investing to support the long-term growth, given the upside that we see. <\/p>

And so continue to focus on it and are looking at the path to profitability, path to Free Cash Flow positive to drive attractive returns. That’s obviously in the overall model of it, but very much believe in the long-term growth and believe this is the right level of investment across the business, go-to-market, the product teams continuing to build it out globally.<\/p>

Justin Post, Bank of America Merrill Lynch<\/strong>: Thanks, Sundar. Thanks, Ruth.<\/p>

Operator<\/strong>: Thank you. And our next question comes from the line of Brent Thill from Jefferies.<\/p>

Brent Thill, Jefferies:<\/strong> Good afternoon. Ruth, good to see you lean into the buyback. I think it was your highest buy-back ever, while other tech companies have kind of run away from it. I’m just curious if you could talk about your capital allocation strategy and ultimately how you are thinking about the buy-back.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Thank you. I mean, at the heart of the capital allocation strategy is really what we have been talking about on this call: investing in long-term growth and driving cash flow so you have the opportunity to continue to invest and return capital to shareholders. We’re very pleased that we were able to increase the authorization up to $70 billion, and do continue to believe it’s yet another valuable tool in the overall set of investments that we make. So pleased to have it.<\/p>

Operator: <\/strong>Thank you. And our next question comes from Mark Mahaney from Evercore ISI.<\/p>

Mark Mahaney, Evercore ISI:<\/strong> Great, thanks. Philipp, you talked about the beginning of monetizing YouTube Shorts. Do you have any lessons that you’ve drawn so far; or in the long-term is there any view you have on whether that inventory can be better or less monetized than other YouTube inventory that you’ve had traditionally historically? <\/p>

And then secondly, just on these comments on the pullback by some advertisers, so you talk about strength in Retail and especially in Travel, so what’s left? Does that mean that you’re seeing weakness out of Western Europe in financial verticals and maybe automotive? Any color on which advertisers are pulling back would be helpful. Thank you.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> So on the Shorts side, on the monetization side, I am sticking with the statement I made before. We’re encouraged by the results that we’re seeing. We’re excited about the opportunity. There’s not more -- not a lot more detail that we can share at this point in time. <\/p>

On the pullback in spend by some of the advertisers, as Ruth mentioned, the pullbacks in spend on YouTube and Network by some advertisers in the second quarter reflects uncertainty about a number of factors.<\/p>

And for each advertiser, it’s actually challenging to disaggregate. The uncertainty differed, between companies and sectors. And as you can see from the news, some companies were impacted by multiple factors as well.<\/p>

Mark Mahaney, Evercore ISI:<\/strong> Okay, thank you.<\/p>

Operator:<\/strong> Thank you. And our next question comes from Colin Sebastian from Baird.<\/p>

Colin Sebastian, Baird:<\/strong> Thanks. Good afternoon. Maybe one 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?<\/p>

And then secondly, you’ve given us some good data over the last year or so around conversational and visual search queries and strong growth there. Curious how that also translates into maybe different types of monetization relative to text-based search. Does this give you greater monetization capability in Search, or how would that impact monetization? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Yeah, thanks. Good question. And, look, one way we can think about it is, you know, 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 -- you know, things -- AI work which is actually happening very close or within the areas like Search and YouTube, et cetera. <\/p>

And so you can imagine a scenario in which we are prioritizing and on the margin moving resources to making sure we are driving product improvements – which flow through a moment like that. That would be an example of sharpening focus for me.<\/p>

And when I think about -- think about the opportunities out of AI, just coming out of I\/O this year, looking at the progress we have made, how much we have made progress with multisearch, how multimodal things are getting; and the fact that people are now actually doing voice searches a lot, visual searches a lot, all that is a good example of how we are driving value in our core products.<\/p>

Similarly, if you take ads at Google Marketing Live, the team talked a lot about AI-driven products and features that really give value to advertisers in the most privacy-forward way. <\/p>

And Cloud is, I would say -- a lot of the AI opportunity today plays out as more from a data analytics standpoint. It’s within that segment we see the most strength. But over time, I think there will be broader opportunities as well.<\/p>

And on top of it all, we are continuing to see a lot of breakthrough work coming from our Research teams, be it LaMDA 2, PaLM, Minerva or some of our recent advances. <\/p>

So we’ll stay cutting edge, drive progress and keep focusing on turning that research into real products and applications, and we’ll take a long-term view.<\/p>

Colin Sebastian, Baird: <\/strong>Thank you.<\/p>

Operator: <\/strong>Thank you. And our last question comes from the line of Ross Sandler from Barclays.<\/p>

Ross Sandler, Barclays<\/strong>: Philipp, maybe just following up on the Retail segment. So some of the biggest retailers in the world, like Walmart, are really struggling and are looking to cut costs. And sounded to me from what Ruth just said about supply chain, inventory, inflation, that they might be cutting on YouTube. So I’m just curious, can you flesh out what you guys are doing in Search from a product perspective to keep that Retail category as strong as it is? <\/p>

You mentioned PMax for some of the smaller advertisers and omnichannel for the larger. But maybe just elaborate on how that -- what strategy you guys are using to keep that spend flowing, or is that just a timing thing and it might drop off at some point in the future? Thanks a lot.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yeah, thank you. This is an excellent question.<\/p>

As I noted in my opening remarks, Retail continued to be an important driver of Search in the second quarter. We saw strong Search interest in several categories. I called out apparel -- categories like women’s clothing earlier. <\/p>

I think it’s also worth clarifying when we talk about Retail growth, we talk about our overall approach to Retail, which runs through all of our ads products and surfaces. And our Shopping strategy is just one important piece of that. <\/p>

From a trend perspective, you are absolutely right, omnichannel remains the way to win. Retailers continue to build their digital presence to drive both online and offline sales. And we’re obviously helping them do it.<\/p>

Over the last few quarters, I think I’ve talked quite a bit about the ways how we’re doing this. In Q2, like in Q1, we saw a year-over-year increase in adoption of, for example, Local Inventory Ads. These are mobile-first and location-based and helping businesses of all sizes showcase their products and stock in store or online or available for store or curbside pickup or all different variations. <\/p>

Additionally, we’re midway through the migration from Smart Shopping campaigns into Performance Max, which you also mentioned. And advertisers have been pleased with increased reach and increased performance.<\/p>

And our focus really has always been on building tools and features to help both offline and online businesses connect directly with these customers across our platforms. <\/p>

And we’re excited about what’s next for retail commerce across our surfaces, especially Search and YouTube. And we will remain focused on building helpful, great products and experiences for both users and these businesses.<\/p>

Operator: <\/strong>Thank you. And that concludes our question-and-answer session. I would like to turn the conference back over to Jim Friedland for any closing remarks.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>Thanks, everyone, for joining us today. We look forward to speaking with you again on our third quarter 2022 call. Thank you and have a good evening.<\/p>

Operator:<\/strong> Thank you. This concludes today’s conference call. Thank you for participating. And you may now disconnect.<\/p>

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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/p>

Alphabet Q3 2022 Earnings Call <\/strong>
October 25, 2022<\/strong><\/p>

Operator:<\/strong> Welcome everyone. And thank you for standing by for the Alphabet third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to *11 on your telephone. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>Thank you. Good afternoon, everyone, and welcome to Alphabet’s third-quarter 2022 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat. Now I’ll quickly cover the Safe Harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such 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 most recent Form 10-K filed with the SEC, as updated in our Form 10-Q for the quarter ended September 30, 2022, expected to be filed with the SEC later today. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor. And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thank you, Jim, and good afternoon, everyone. Our financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud. Our reported results reflect the effect of foreign exchange. The growth in our advertising revenues was also impacted by lapping last year’s elevated growth levels and the challenging macro climate. <\/p>

We are sharpening our focus on a clear set of product and business priorities. The product announcements we’ve made in just the past month alone have shown that very clearly - including significant improvements to Search powered by AI, new ways to monetize YouTube Shorts, which will support the creator ecosystem, a strong series of hardware launches and new product and partnership announcements at Cloud Next. <\/p>

These will all drive value for users, partners and our business. <\/p>

We’ve also started our work to drive efficiency, by realigning resources to invest in our biggest growth opportunities. Over the past quarter, we’ve made several shifts away from lower priority efforts to fuel higher growth priorities.<\/p>

Our Q4 headcount additions will be significantly lower than Q3. And as we plan for 2023, we’ll continue to make important trade-offs where needed, and are focused on moderating operating expense growth. <\/p>

Throughout Google’s history, periods of dedicated focus have enabled us to emerge strongly, and unleash new eras of computing innovation. For example, over a decade ago, focusing the company’s efforts on mobile helped us to build and grow our business for the shift to mobile computing. We’re at a similar point now with AI, another transformational technology. Our investments in AI and deep computer science mean that we can deliver a wide range of breakthroughs across our products and services, to help people, businesses, and communities.<\/p>

Turning to the quarter. First, our core information products. At our Search On event, we shared how we’re using AI advances to deliver a more natural and intuitive Search experience. These advancements will soon help to surface things you might find helpful, before you’ve even finished typing. <\/p>

We’re also making visual search more natural than ever before. People now use Google Lens to answer more than 8 billion questions every month, using just a photo or an image. Now, we’re supercharging our visual search capabilities to help people find what they’re looking for at businesses nearby. Philipp will also talk in more detail about our work to make it easier to shop on Google, a key focus.<\/p>

Google Lens also has an amazing translation feature. It can now blend translated text seamlessly into the background of images -- like menus or street signs -- in just one hundred milliseconds; shorter than the blink of an eye. <\/p>

Through advanced language models, AI is unlocking new experiences that support more natural and conversational ways to interact with computing. LaMDA is one of our most promising models for this. It’s now available to demo in our AI Test Kitchen, which offers a way for people to experience and give feedback on emerging AI technology. DeepMind also debuted its most helpful, and safest language model yet. Sparrow can talk to users, answer questions, and provide evidence-based answers using Google Search.<\/p>

Moving to YouTube, another big priority. We remain focused on long term growth for our community of viewers, creators and advertisers. To that end, we announced some exciting changes at our Made On YouTube event last month. First, improving the monetization of Shorts. This is a big deal for creators and for our business. We’ll introduce revenue sharing on Shorts early next year. This update makes YouTube the only platform where creators can monetize their content across short, long and live formats at scale. Shorts continues to show great user momentum. And we continue to invest in our mobile video tools for creators. We’re seeing mobile-first creators investing more in the platform, creating content that helps the broader community grow. <\/p>

TV is a big area for us, as well. Nielsen reported that YouTube was the leader in streaming TV viewership in the U.S. in September, for the first time.<\/p>

Turning next to hardware. Hardware is an important area of investment for us. We are investing deeply from the silicon to the OS to powerful software experiences, because it’s a big opportunity to move computing forward and build deeper relationships with people who love using Google products. It also really helps to guide the Android ecosystem, beyond just building the underlying platform. <\/p>

Earlier this month, we introduced the Pixel 7, the Pixel 7 Pro, and the very first Pixel Watch. We also previewed more detail about the Pixel Tablet, which is coming in 2023. Pixel combines our foundational technologies — AI, Android, and our Google Tensor G2 processor — to bring state-of-the-art AI directly to the device. The Pixel 7 and Pixel 7 Pro offer industry-leading photography features that can unblur or sharpen photos and shoot cinema-quality videos. We recently had our highest-selling week ever for Pixel, and I’m really proud of the positive reviews so far. <\/p>

Along with great devices, we introduced our latest release of Android. Android 13 offers new personalization features, improved privacy controls, and a more seamless experience with connected devices.<\/p>

Next, Google Cloud. We see continued momentum with Q3 revenue of $6.9 billion, with Google Cloud Platform’s revenue growth rate above the aggregate. <\/p>

I’ve long shared that Cloud is a key priority for the company. The long-term trends that are driving cloud adoption continue to play an even stronger role during uncertain macroeconomic times. Google Cloud helps customers solve today’s business challenges, improve productivity, reduce costs, and unlock new growth engines. <\/p>

At Cloud Next, we unveiled more than 100 new products, and announced new and expanding relationships with Toyota, Prudential PLC, Coinbase, and AppLovin.<\/p>

The shift to hybrid work continues, with organizations evolving to support an increasingly distributed workforce. I’m proud to share that Google Workspace is now used by more than eight million businesses and organizations worldwide. That includes Korean Air as well as the U.S. Army, which is transitioning 250,000 personnel to our secure communication and collaboration platform.<\/p>

In the past year, we’ve announced nearly 300 new capabilities to support hybrid work. <\/p>

Empowering a distributed workforce brings an increased need for cybersecurity to keep workers, data, and critical business systems safe and secure. It is top of mind for nearly every CEO I speak with, and customers including the City of Los Angeles, Roche, and Banorte put their trust in Google Cloud’s industry-leading products.<\/p>

Our new Chronicle Security Operations suite unifies security analytics, automation, response and threat intelligence. This has helped Vertiv analyze twenty-two times more security data, while cutting investigation time in half. <\/p>

In September, we closed our acquisition of Mandiant, and are proud to welcome more than 2,600 colleagues to Google. With Mandiant, we add industry-leading threat intelligence and incident response capabilities to help customers stay protected at every stage of the security lifecycle. <\/p>

Customers partner with Google Cloud because we offer a single platform that can analyze data across any Cloud. Our leadership here is winning customers across industries, including the State of Hawaii and the Australia Securities Exchange. <\/p>

Our capabilities help solve difficult business challenges, like supply chain and logistics, while also creating new growth opportunities. <\/p>

And as companies globally are looking to drive efficiencies, Google Cloud’s open infrastructure creates a valuable pathway to reduce IT costs and modernize. In addition, with our new Media CDN product for large media streaming workloads, we’re helping Major League Baseball and Paramount+ deliver flawless experiences to their customers. And with Google Cloud Edge, Rite Aid is more efficiently helping patients in their pharmacies. <\/p>

Across all of these areas, I’m proud of the trust and enthusiasm our customers are placing in Google Cloud.<\/p>

Briefly on our Other Bets. Waymo announced that Los Angeles will be its third ride-hailing city, joining Phoenix and San Francisco. Waymo will begin by mapping several neighborhoods in LA, as it prepares to serve people there. Wing just surpassed three hundred thousand commercial deliveries. It’s servicing new areas in Australia, and announced its first drone delivery trials in Ireland.<\/p>

To close, times like this are clarifying. As we head into 2023, we’re going to focus on our most important priorities as a company. To support our growth, we will continue to invest responsibly, for the long-term, in a way that is responsive to the current economic environment. <\/p>

I want to thank our employees around the world for their contributions over the last quarter. We help people, our partners and society when we focus on what we do best, and execute on that really well
Over to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>Thanks, Sundar - and hello everyone. It’s great to be joining you all today.<\/p>

Google Services revenues of $61B were up 2% year-on-year, negatively affected by a sizable foreign exchange headwind. Search and Other revenues grew 4% year-over-year to $40B, led by Travel and Retail, while both YouTube Ads and Network had modest year-over-year revenue declines. <\/p>

Other Revenues were up 2% year-over-year, with growth in YouTube non-advertising and hardware revenues offset by a decrease in Play revenues. Play revenues were lower due to a number of factors, including a decline in user engagement in gaming from the elevated levels seen earlier in the pandemic. Among other factors, this shift in user behavior also created downward pressure on our advertising revenues with lower revenues from app promo spend on YouTube, Network and Play ads in Search & Other. <\/p>

I’ll highlight a couple of other trends that affected our Ads business in Q3 and Ruth will provide more detail.<\/p>

On the second quarter earnings call, we noted a pullback in spend by some advertisers in YouTube and Network and these pullbacks in spend increased in the third quarter. <\/p>

In Search and Other, the largest factor in the deceleration in Q3 was lapping the outsized performance in 2021. In the third quarter, we did see a pullback in spend by some advertisers in certain areas in Search ads. For example, in Financial Services, we saw a pullback in the insurance, loan, mortgage and crypto subcategories. <\/p>

There’s no question we’re operating in an uncertain environment - and that businesses, big and small, continue to get tested in new and different ways depending on where they are in the world.<\/p>

When it comes to how we’re helping - our focus remains unchanged. The same AI driving breakthroughs in everything from protein-folding, flood forecasting, and language understanding is also fueling innovation across our ads products. Via insights, automation, and easier-to-use advertising tools and formats, we’re helping businesses stay agile, build resilience, anticipate the future, and show up for customers in more connected, visual, and consistent ways. We’re helping them understand demand, deal with inventory challenges, increase loyalty, and much more.<\/p>

In challenging times like these, advertisers are carefully evaluating the effectiveness of their budgets. Search tends to do relatively well in such an environment, given its strong measurability and focus on delivering ROI. It’s also well suited to quickly adjust to changes in consumer behavior. And when Search is coupled with our automation products across bidding, creatives, targeting or Performance max, it can drive performance even further.<\/p>

Let’s talk retail - an important vertical for us. No matter where shoppers are buying - whether it’s in store, online, or both - we have the solutions to help them deliver results wherever their customers are.<\/p>

Take online fashion retailer, Revolve, who used its global influencer network along with our category insights and automated tools to acquire new customers at lower costs. As festivals and events returned this summer, Revolve used lower funnel solutions across Search and Shopping to engage with consumers in high demand apparel categories - helping it cross $1B in trailing 12 month net sales for the first time.<\/p>

Then there’s Magazine Luiza - a large Brazilian retailer who embraced omnichannel by measuring and bidding directly to store sales. Coupled with in-store pick-up annotations via PMax - Magazine Luiza drove a 38% ROAS over 30 days and has since expanded this strategy to all eligible products, including 8M+ new offers. <\/p>

And whether shoppers know exactly what they’re looking for or are just seeking inspiration, we’re innovating to make it easier and more engaging for people to shop online, across our surfaces.<\/p>

From finding the best deals across all types of merchants - including 200M+ available daily deals in Q3…to new ways to search. Now when you type “shop” followed by whatever item you’re looking for, you’ll unlock a visual content stream of ideas that feels just like window shopping - but online. <\/p>

And then there’s YouTube. Not only can users now buy more products in videos but “shopping as entertainment” experiences are bringing the magic of our creators to the shopping experience.<\/p>

Like in September when Kylie and Kris Jenner hosted an exclusive shopping stream event to celebrate the debut of a new Kris Collection for Kylie Cosmetics. <\/p>

And at AdWeek last week, not only did we announce that product feeds are coming to Discovery, but that creators will soon be able to tag products from brands across their videos, Shorts, and livestreams. This means viewers can shop products seamlessly while they watch their favorite content, while merchants can drive incremental reach and engagement for free listing offers when tagged by creators that viewers love and trust. <\/p>

I already touched on YouTube’s performance in the quarter - let’s deep dive into what we’re focused on.<\/p>

First, we’re helping advertisers understand how they can drive effectiveness with every campaign they run on YouTube. Full funnel is a key way to do this. <\/p>

Buying YouTube across consideration, awareness, and action allows marketers to meet customers at different stages in their purchasing journey - which we know are increasingly complex - while delivering towards a key business goal. Creative and media work together across the funnel to create new demand and convert current demand. <\/p>

Castlery, a Singapore furniture retailer, activated a full funnel approach as part of its US expansion. It used brand and action formats, identified its most relevant audiences, and built a robust measurement framework to boost sales and awareness - including a 65% increase in US brand searches. Castlery is using this same strategy for the upcoming holiday season. <\/p>

Two other areas where we’re continuing to invest: Connected TV and Shorts.<\/p>

First on CTV. Eyeballs keep moving away from traditional TV. On average, global viewers are watching 700M+ hours of YouTube content on TV daily, and according to Nielsen, during the 2021\/2022 US broadcast seasons, YouTube reached more viewers during primetime on CTV than any linear TV Network. Brands continue to take notice. <\/p>

Like Instacart - who tapped into CTV to maximize its TV screen strategy for its “The World is Your Cart” brand campaign featuring Lizzo. It drove breakout searches for its product and above average brand lift across awareness, consideration, and purchase intent, and it also engaged a significant increase in audience on top of TV, with 66% lower CPMs.<\/p>

Then there’s Shorts. 1.5B users every month, 30B daily views. Engagement is strong. We’ve always said that we focus on building a great user and creator experience first, and then follow that with monetization over time. As of September, ads on Shorts have officially launched via Video Action, App, and Performance Max campaigns. <\/p>

As Sundar mentioned, we also extended the YouTube Partner Program and announced our revenue sharing model for Shorts creators - the first-of-its-kind for short-form content. It’s early, but we’re encouraged by the progress we’ve made this year in Shorts monetization and support for sustaining the creator ecosystem.<\/p>

I’ll close with something I’ve said before, and I think is worth reiterating: our success is only possible when our customers and partners succeed. Whether it’s helping individual YouTube creators or Play developers make a living (and build thriving businesses) or bringing the best across Google to our partners, our focus on driving growth for our partners and key ecosystems remains steadfast. I’m proud that over the past three years, we’ve paid creators, artists and media companies over $50B. In terms of how we’re helping our partners innovate, I’ll share two highlights:<\/p>

First - a transformative partnership with Transsion, the #1 OEM in Africa and Pakistan will help it close the digital divide by doubling annual activations by 2025 and build helpful products for the next billion users. <\/p>

And then, in Commerce, with FEMSA Digital in Mexico, we’re bringing together solutions across Ads, Cloud, Maps, Waze and beyond to bolster its data and analytics capabilities so it can better reach and retain its beverage and retail customers. <\/p>

On behalf of many, a massive “thank you” to our customers and partners for their collaboration, trust, and feedback. And another massive “thank you” to our sales, partnerships, product, engineering, and support teams. The hard work, dedication, and ingenuity of Googlers - especially during more challenging times - is truly second to none. <\/p>

On that note, over to you Ruth.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: Thank you, Philipp. <\/p>

Our financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud. Our reported results clearly reflect the effect of foreign exchange. <\/p>

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.<\/p>

For the third quarter, our Consolidated Revenues were $69.1 billion, up 6%, or up 11% in constant currency. <\/p>

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. <\/p>

Operating expenses were $20.8 billion, up 26%, reflecting the following:<\/p>

First, the increases in R&D and G&A expenses, which were driven primarily by headcount growth; and second, the growth in Sales & Marketing expenses, which was driven primarily by increased spending on ads and promotions, followed by headcount growth. <\/p>

Operating income was $17.1 billion, down 19% versus last year, and our operating margin was 25%. <\/p>

Other Income & Expense was a loss of $902 million. Net income was $13.9 billion. <\/p>

We delivered Free Cash Flow of $16.1 billion in the quarter, and $63 billion for the trailing 12 months. We ended the quarter with $116 billion in cash and marketable securities. <\/p>

Let me now turn to our segment financial results. As a reminder, we provide fixed foreign exchange revenues only at the consolidated level and by geographic region. All segment revenues are reported on a GAAP basis.<\/p>

Starting with our Google Services segment. Total Google Services Revenues were $61.4 billion, up 2%. <\/p>

Across our advertising revenues, the year-over-year deceleration in growth rates versus the third quarter of last year was largely driven by lapping very strong performance, most notably in Search and Other revenues. Additionally, the year-on-year deceleration on YouTube and Network reflects a pullback in spend by some advertisers, as we first noted last quarter. <\/p>

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%. <\/p>

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.<\/p>

Finally, the growth in these two 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. <\/p>

In terms of costs within Google Services, TAC was $11.8 billion, up 3%. <\/p>

Google Services Operating income was $19.8 billion, down 17%, and the operating margin was 32%.<\/p>

Turning to the Google Cloud segment, revenues were $6.9 billion for the second [sic] third quarter, up 38%.<\/p>

GCP’s revenue growth was again greater than Cloud’s, reflecting significant growth in both infrastructure and platform services. Strong revenue growth in Google Workspace was driven by growth in both seats and average revenue per seat. <\/p>

Google Cloud had an Operating Loss of $699 million. <\/p>

As to our Other Bets, for the third quarter, revenues were $209 million and the operating loss was $1.6 billion.<\/p>

Let me close with some comments on our outlook. Our results in the third quarter reflect an increased headwind from foreign exchange, given the ongoing strengthening of the U.S. dollar versus last year. Excluding the revenue benefit from hedging, there was a six-point headwind year-on-year, or five points with the hedge benefit, compared with a slight tailwind in the third quarter of 2021.<\/p>

Looking to the fourth quarter, based on strengthening of the U.S. dollar quarter to date, we expect an even larger headwind from foreign exchange. <\/p>

In addition, as we have previously said, the impact of foreign exchange is greater on operating income than it is on revenues, given that our expense base is weighted more toward the U.S. with most of our R&D efforts located here. <\/p>

Turning to our segment results, within the Google Services segment, Search and Other revenues had healthy fundamental growth in the third quarter, which was affected by the impact of currency movements.<\/p>

As I already noted, the largest driver of the deceleration in year-on-year growth of Search compared with 3Q21 was lapping the outsized growth in 2021. <\/p>

The sequential deceleration in the year-on-year growth of Search in the third quarter versus the second quarter was also driven by lapping, with an additional headwind from pullback in advertiser spend in some areas. <\/p>

In YouTube and Network, the sequential deceleration of year-on-year growth in the third quarter versus the second quarter primarily reflects further pullbacks in advertiser spend.<\/p>

In the fourth quarter, the very strong revenue performance last year will continue to create tough comps that will weigh on the year-on-year growth rate of advertising revenues. <\/p>

Within Other Revenues, we expect an ongoing headwind from the slowdown in buyer spend on Google Play due to a number of factors, including lower levels of user engagement in gaming that impacted results in the second and third quarters.<\/p>

As Philipp mentioned, among other factors, this shift in user behavior was also a headwind to advertising revenues, with lower revenues from app promo spend on YouTube, Network and Play ads in Search & Other. <\/p>

Turning to Google Cloud, our results reflect momentum across GCP and Workspace. Customers globally are adopting our products and services to digitally transform their businesses.<\/p>

We are excited about the opportunity, given that businesses and governments are still in the early days of public cloud adoption, and we continue to invest accordingly. We remain focused on the longer-term path to profitability. <\/p>

In terms of profitability, we have an effort underway to ensure we redeploy investments against our most compelling opportunities.<\/p>

As we noted on our second quarter call, our actions to slow the pace of hiring will become more apparent in 2023. With respect to Alphabet headcount, we added 12,765 people in the third quarter, including more than 2,600 of those joining Google Cloud as part of our acquisition of Mandiant. As in prior quarters, the majority of hires were for technical roles. <\/p>

In the fourth quarter, we expect headcount additions will slow to less than half the number added in Q3.<\/p>

Within this slower headcount growth next year, we will continue hiring for critical roles, particularly focused on top engineering and technical talent. <\/p>

Turning to capex, we continue to make significant investments in Technical Infrastructure, with servers as the largest component.<\/p>

Thank you. Sundar, Philipp and I will now take your questions.<\/p>

Operator: <\/strong>As a reminder, to ask a question, you will need to press *11 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated. <\/p>

Our first question comes from the line of Eric Sheridan of Goldman Sachs. Your question, please.<\/p>

Eric Sheridan, Goldman Sachs: <\/strong>Thank you very much. Maybe two 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.<\/p>

And then, Philipp, a lot of comments in there about YouTube and the potential for growth going forward. Can you go a little bit deeper on what you’re seeing in terms of both the opportunity set to drive revenue and turn a possible headwind into a tailwind with respect to Shorts and connected TV over the medium to long-term? Thanks so much.<\/p>

Sundar Pichai, CEO Google: <\/strong>Thanks. 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. <\/p>

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, 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.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yes, and from my side, Eric, in the third quarter, as I mentioned, there was a further pullback in spend by some advertisers across both brand and direct response, but overall, I feel YouTube remains in a really good position to continue to benefit from the streaming boom. <\/p>

In direct response, we think there’s a lot of room to run to make really YouTube more shoppable, more actionable -- from Video Action Campaigns to product feeds, app campaigns, live commerce features. Advertisers are turning to YouTube to convert intent into action and really drive performance at scale.<\/p>

Product feeds are coming to Discovery ads soon and recently expanded to Shorts. We are already seeing results. And, in fact, on average, Video Action Campaigns with product feeds saw an over 70% increase in conversions on Shorts versus those without. <\/p>

On the brand side, as I said earlier, eyeballs are moving away from linear TV, and we are helping brands move beyond traditional -- to efficiently really achieve their reach and awareness goals. And obviously you mentioned that as well, Connected TV is an important part of this strategy.<\/p>

When you think about it, YouTube is really the best place for advertisers to reach new consumers across multiple formats and screens -- from Shorts to long-form podcasts, music, all the way to CTV.<\/p>

Operator: <\/strong>Thank you. Our next question comes from Brian Nowak of Morgan Stanley. Your question, please, Brian Nowak.<\/p>

Brian Nowak, Morgan Stanley:<\/strong> Thanks for taking my questions. I have two. First one for Sundar or Ruth. Sundar, just to go back to the comment about earlier in the quarter becoming 20% more efficient. I thought tonight your comment – investing responsibly over the long term, about being responsive to the environment is helpful. But if I look at, sort of the Excel sheet, I think you have added about 51,000 new people to the company since the start of last year. Can you give us some examples of internal KPIs or quantifiable analysis you’re running just to ensure you’re generating ROI for investors from all your hiring as you sort of run through these analyses? That’s the first one. <\/p>

And the second one, Philipp, just on Shorts, are you seeing Shorts lead to incremental time spent from those users? Or is it more so you’re seeing the time shift from other forms of YouTube over to Shorts?<\/p>

Sundar Pichai, CEO Google:<\/strong> Brian, look, I think we gave some -- we’ve been clear that we are going to moderate our pace of hiring – going into Q4 as well as 2023.<\/p>

I think we are seeing a lot of opportunities across a whole set of areas. And every time -- talent is the most precious resource, so we are constantly working to make sure everyone we have brought in is working on the most important things as a company, and particularly so. And that’s a lot of what sharpening our focus has been about. <\/p>

We are reviewing projects at all scales pretty granularly to make sure we have the right plans there, and based on that, the right resourcing and making course corrections. And this will be an ongoing thing. It is something we will continue doing going into ’23 as well.<\/p>

Philipp Schindler, SVP and CBO, Google<\/strong>: Yes, and to the second part of the question, as we discussed before, we’ve always focused on building a great user and creator experience first, followed by increasing monetization over time. <\/p>

We continued to experience a slight headwind to revenues as Shorts viewership grew as a percentage of total YouTube watch time. And as I alluded to earlier, the initial progress on Shorts monetization has been encouraging. And we are focused on closing the monetization gap between Shorts and long-form content on YouTube over time. <\/p>

And more specifically, consumers are increasingly consuming short-form video. We are seeing this across multiple platforms, including YouTube. And as I said earlier, Shorts are being watched by 1.5 billion+ logged-in users every month.<\/p>

Brian Nowak, Morgan Stanley<\/strong>: Great. Thank you, both.<\/p>

Operator: <\/strong>Thank you. Our next question comes from the line of Doug Anmuth of JP Morgan. Your question, please, Doug Anmuth.<\/p>

Doug Anmuth, J.P. Morgan:<\/strong> Thanks for taking the question.<\/p>

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? <\/p>

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? Thanks.<\/p>

Ruth Porat, CFO Alphabet and Google: <\/strong>Thanks for the question.<\/p>

Yes, we are pleased with the ongoing momentum. It’s across a wide range of industries and geographies, and it really comes back to the team’s focus on helping them solve unique business issues and innovate in new areas as they digitally transform. <\/p>

I think more to your question, and we talked about this a bit last quarter – in some cases certain customers are taking longer to decide, and some have committed to deals with shorter terms or smaller deal sizes, which we attribute to more challenging macro environments. Some are impacted due to reasons that are specific to their business.<\/p>

But overall, as you can see from the results here again, we’re pleased with the momentum in Cloud and do continue to be excited about the long-term opportunities. So that’s why I made the comment that we do continue to invest meaningfully in this business. We’re still focused, very much so, on the path to profitability and free cash flow strength here. But we are continuing to invest in the business. <\/p>

And this fits within Sundar’s overall comments as we’re looking at how we prioritize. And they’re certainly making sure they are focused on every element within their business. But fundamentally, to the heart of your question, we are continuing to invest here.<\/p>

Doug Anmuth, J.P. Morgan: <\/strong>Thank you.<\/p>

Operator: <\/strong>Thank you.<\/p>

Our next question comes from the line of Michael Nathanson of MoffettNathanson. Your line is open, Michael Nathanson.<\/p>

Michael Nathanson, MoffettNathanson: <\/strong>Thanks. Sundar, one for you, and one for you, Ruth.<\/p>

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 product reviews, recommendations, advice. I’m interested in learning if you have seen any changes in your Search behavior by demographics at Google? And then do you think Search has become more visual and less text-based going forward in order to maintain more relevance for younger users? That’s one.<\/p>

And then, Ruth, can you just dig in a bit on the opex growth in Google Services? You called out Other Cost of Revenues being up 20%. It looks like as percentage of revenues, it’s nearly an all-time high. Can you tell me a bit about how much of that cost basis is fixed versus variable? And anything on outlook on what’s driving kind of the spike this quarter, and maybe what you expect going forward there on the Cost of Revenues. Thanks.<\/p>

Sundar Pichai, CEO Google:<\/strong> 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. <\/p>

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. And so these are all learnings we are constantly taking in, and we use it to improve Search.<\/p>

And if you saw Search On, we had many, many explorations and product directions which move in that direction. So I think it’s a healthy way of iterating and innovating to build the best products and services for our users.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> In terms of your question regarding margins, two parts, really. On Other Cost of 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. <\/p>

And then CAC moved from its usual number two spot down to number three. And there were really two key factors for the change in the rank order between hardware and CAC. Probably pretty self-evident, but just to spell them out, the year-on-year decline in YouTube Ads revenues obviously muted the growth in CAC. And then the growth of Pixel phone sales, due primarily to the launch of Pixel 6a, drove that shift. <\/p>

What we are looking at overall, sort of to your broader question about profitability in Google Services, is the overall pace of investment and how we’re looking at how -- with the mix change and ongoing opportunities to drive revenue growth, how it flows through all the way to op inc growth.<\/p>

And so to Sundar’s opening comments, and as we’ve been talking about, some of the margin upside last year was due to timing issues with the very strong growth of revenues, and there was a lag in investments. And what we’re focused on here is how do we continue to manage on a go-forward basis to deliver durable long-term results.<\/p>

Michael Nathanson, MoffettNathanson: <\/strong>Thank you.<\/p>

Operator<\/strong>: Thank you. Our next question comes from the line of Ross Sandler of Barclays. Your question please, Ross Sandler.<\/p>

Ross Sandler, Barclays: <\/strong>Hey, guys. I hate to beat the dead horse on the Google Services margin. But Ruth, you just mentioned mix shifts. 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 profits are 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 years.<\/p>

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. Thank you.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Well, I’ll, as I’m sure you would expect, leave the modeling to you; but there are two elements of it. And I think Sundar and Philipp really talked about the first part, which is the ongoing opportunity we see with Search, with YouTube, with some of the actions that we’re taking; the opportunity with AI applied to both, the opportunity as we continue to build out monetization on YouTube Shorts, in particular.<\/p>

So we’re continuing to focus on both the driver here, revenue, as well as the investments that we’re making. And want to make sure, to Sundar’s comments about sharpening our focus, that we are economizing; utilizing resources as effectively as possible.<\/p>

So it’s both -- it is both the efforts we’re taking around expense management and building for durable performance, as well as the efforts we’re taking – which are in the investment line but drive top-line performance.<\/p>

I would say we also contextualize it, and I tried to do that in response to Michael’s questions. And we said this last year -- we’ve noted it -- that some of the margin upside last year was due to timing issues. And we had a very strong growth in revenues, a surge in revenues and a lag in investments that we said was a timing difference. And you are seeing some of that here. <\/p>

But to the main point, we’re looking at both what we can do to continue to support long-term revenue growth, but while doing so, being mindful of the pace of investment. I’ll leave the modeling to you.<\/p>

Operator: <\/strong>Thank you. Our next question comes from Brent Thill of Jefferies. Your line is open, Brent Thill.<\/p>

Brent Thill, Jefferies: <\/strong>Ruth, on the pullback by some advertisers, is there a common thread that you can draw on, common underlying characteristics that are pulling back versus those that are continuing to lean forward? Can you talk about that dynamic and what you’re seeing.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Why don’t I start, and 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 is 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 on year-on-year growth. <\/p>

I think what’s notable in Search, we had really healthy growth in Q3, excluding the impact of foreign exchange. The sequential deceleration in Search in the third quarter versus the second quarter was again primarily driven by lapping. And just want to make sure that that was clear. <\/p>

There was some pullback from advertiser spend in some areas. Philipp noted that in opening comments.<\/p>

And then in YouTube and Network, the sequential deceleration of year-on-year growth in – both the second quarter [sic] – the third quarter versus the second quarter was really further pullbacks in advertiser spend.<\/p>

Philipp Schindler, SVP and CBO, Google<\/strong>: Yeah, that’s exactly right. As I said earlier, in Search and Other Ads Revenues, while lapping the outsized performance was the largest factor in Q3, we did see some advertiser pullback in certain areas -- in Search Ads, and I think the example I called out was in Financial Services, in the areas of insurance, loan, mortgage, crypto subcategories. <\/p>

And we also noted a pullback in spend by some advertisers on YouTube and Network. And these pullbacks in spend increased in the third quarter, and we also noted lower revenues from app promo spend on YouTube and Network.<\/p>

Operator: <\/strong>Thank you. Our next question comes from Mark Mahaney of Evercore ISI. Please go ahead, Mark Mahaney.<\/p>

[edited to remove comments on technical difficulties during the call].<\/p>

Mark Mahaney, Evercore ISI: <\/strong>Okay. Two questions, please. One, Sundar, you have been with the company for a long time. You have seen these cycles before. Can you put any context as to the -- as economic conditions wax and wane, the impact that has on Google? How does this environment look to you versus prior cycles that the company has managed through?<\/p>

And then, Ruth, on the cost side, I understand the comments. I understand the comments about the headcount adds and what you plan to do in the fourth quarter. But could you talk about non-headcount-related costs and the opportunity you see or the need you see for managing those down? And do you see that there’s significant opportunities to do that as well? So again, non-headcount costs. Thank you very much.<\/p>

Sundar Pichai, CEO Google: <\/strong>Thanks, Mark. A couple things. I think, compared to the past, I think going through this, there is, as we’ve 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.<\/p>

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.<\/p>

Third, just like when we went through it last time, ahead of us was a decade of mobile and the opportunities it brought. And to me, sitting now, looking at all the work that’s going on in AI, we’ve been an AI-first company for the past 7 years and all the investments. And it looks like a big opportunity ahead.<\/p>

So keeping all that in mind, focused on the long term, using this moment to be disciplined and prioritize and focus, I think, will set us up well for the next decade ahead.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> 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. <\/p>

There are obviously, to your question, non-payroll-associated expenses that also then attach. And so an operating environment like this adds urgency to prioritization. We want to make sure we are using all resources as effectively and efficiently as possible.<\/p>

At the same time, as we tried to be very clear, there are very exciting areas that we will continue to invest in. And so part of this is resource optimization, constraint optimization, however you want to describe it. We want to free up where we can to ensure we have capacity to invest as needed in opportunities that deliver these durable long-term results that we’ve talked about. <\/p>

We are trying to be smart about redeploying where we can, finding efficiencies where we can, while still investing for long-term growth.<\/p>

Mark Mahaney, Evercore ISI:<\/strong> Thank you, Ruth. Thank you, Sundar.<\/p>

Operator: <\/strong>Thank you. Our next question comes from the line of Maria Ripps of Canaccord. Maria Ripps, your line is open.<\/p>

Maria Ripps, Canaccord:<\/strong> Great, thanks so much for taking my questions. First, you talked about strength in Retail and Travel. Can you maybe talk about automotive advertising and whether you have seen any signs of recovery as supply has been normalizing? And if so, how might this rebound sort of compare to prior cycles? <\/p>

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? <\/p>

And is there any color you can add maybe around relative ROI of PMax?<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>Yes, thank you very much for your question. There’s really no additional color on other verticals, apart from the ones that I mentioned already that I think we should share here at this moment. <\/p>

On the Performance Max side, we touched on earlier in prior quarters -- and just as a reminder, it’s our fully automated Google Ads campaign tied with the most channel and inventory coverage that really helps advertisers deliver a better ROI.<\/p>

And we’ve been listening to feedback from advertisers and have continued to roll out more features since its initial launch to increase transparency and help advertisers steer the automation more effectively, and there are more feature updates to come. <\/p>

In July, we launched a number of new settings, including a seasonality setting that lets marketers make quite atypical adjustments for seasonal campaign bidding, and an optimization score setting that gives an indicator for performance improvement and gives recommendations for better results.<\/p>

So all in all, we’re excited about what’s ahead for PMax, the further simplification of our products in general and, frankly, the value we can keep driving for businesses of all sizes, especially when they need it most.<\/p>

Maria Ripps, Canaccord: <\/strong>Great. Thanks so much for the color.<\/p>

Operator: <\/strong>Thank you. Our next question comes from Justin Post of Bank of America. Justin Post, your line is open.<\/p>

Justin Post, BofA Merrill Lynch: <\/strong>I guess a follow-up about artificial intelligence. First, capex is up 31% year-over-year. Can you talk a little bit about what’s driving that? Can that be pulled back a bit? Is that Cloud or really building up AI capabilities?<\/p>

And then, maybe Sundar, as you think about Search where it is today -- and you have much better visibility on AI capabilities than we do -- how can some of those capabilities be mixed into Search? And when would we as investors maybe see some of those benefits? Thank you.<\/p>

Sundar Pichai, CEO Google:<\/strong> Thanks, Justin.<\/p>

Look, I think on the AI front, we are still in very early innings. We have been very good about, as our Research teams are making progress, bringing it into Search. So pretty much the transformer-based models, including BERT and MUM, are in Search now. It’s driven a massive improvement in Search quality and helped us extend the lead in quality over other products. <\/p>

We are definitely using it to make it multimodal, and I think going back to some of the earlier questions about making sure Search is visual, things like Google Lens, bringing visual search into being able to point your phone at things and ask questions, all that really helps set up Search well for the future of where computing is headed. <\/p>

But AI not only affects Search, it affects all our products. It makes YouTube better, Ads better; and through Cloud, we are bringing it to other companies as well. So we’ll keep that in mind. Thanks.<\/p>

Justin Post, BofA Merrill Lynch:<\/strong> And maybe, Ruth, then on the capex, where is most of that going to? And how do you think about that going forward?<\/p>

Ruth Porat, CFO Alphabet and Google: <\/strong>The majority of capex does continue to be for our Technical Infrastructure. As we’ve talked about on prior calls, servers really has been the largest driver of the investment dollars. <\/p>

The Technical Infrastructure team has consistently focused on levers to improve utilization and efficiency, and they continue to do so. We are investing, to Sundar’s comments, in building out the compute in support of all that we’re doing with our AI teams and are excited about that. <\/p>

Obviously, you had seen some more activity earlier in the year regarding real estate. We feel good about where we are. We are continuing to fit out our offices, et cetera, for utilization in this new return-to-hybrid work environment. But we’re trying to make sure that we’re doing that at an appropriate measured pace and that’s really it. Thank you very much.<\/p>

Justin Post, BofA Merrill Lynch:<\/strong> Thank you, Ruth. Thank you, Sundar.<\/p>

Operator: <\/strong>Thank you. That concludes our Q&A session. <\/p>

I’d like to turn the conference back to Jim Friedland for closing remarks.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>Thanks, everyone, for joining us today. We look forward to speaking with you again on our fourth quarter 2022 call. Thank you and have a good evening.<\/p>

Operator: <\/strong>This concludes today’s conference call. Thank you for participating. You may now disconnect.<\/p>

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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/p>

Alphabet Q4 2022 Earnings Call February 2, 2023<\/strong><\/p>

Operator:<\/strong> Welcome everyone. Thank you for standing by for the Alphabet fourth quarter 2022 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. To ask a question during the session, you will need to press *11 on your telephone. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thank you. Good afternoon, everyone, and welcome to Alphabet’s Fourth Quarter 2022 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat. Now I’ll quickly cover the Safe Harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward looking, and such 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 Forms 10-K and 10-Q filed with the SEC, including our upcoming Form 10-K filing for the year-ended December 31, 2022. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor. Our comments will be on year-over-year comparisons, unless we state otherwise. And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Google:<\/strong> Thank you, Jim. And good afternoon, everyone.<\/p>

It’s clear that after a period of significant acceleration in digital spending during the pandemic, the macroeconomic climate has become more challenging. We continue to have an extraordinary business, and provide immensely valuable services for people and our partners. For example, during the World Cup Final on December 18, Google Search saw its highest query-per-second volume of all time.<\/p>

And beyond our advertising business, we have strong momentum in Cloud, YouTube subscriptions and Hardware. However, our revenues this quarter were impacted by pullbacks in advertiser spend and the impact of foreign exchange.<\/p>

I’ll focus on two major things today in a bit more detail, and then I will give a shorter-than-usual quarterly snapshot from across our business.<\/p>

First, how we unlock the incredible opportunities AI enables for consumers, our partners and for our business; and, second, how we focus our investments and make necessary decisions as a company to get there.<\/p>

First, the AI opportunity ahead. AI is the most profound technology we are working on today. Our talented researchers, infrastructure and technology make us extremely well-positioned as AI reaches an inflection point.<\/p>

More than six years ago, I first spoke about Google being an AI-first company. Since then, we’ve been a leader in developing AI. In fact, our Transformers research project and our field-defining paper in 2017, as well as our path-breaking work in diffusion models, are now the basis of many of the generative AI applications you’re starting to see today.<\/p>

Translating these kinds of technical leaps into products that help billions of people is what our company has always thrived on. Everyone working on the various projects underway is excited.<\/p>

We’ll pursue this work boldly, but with a deep sense of responsibility, with our AI Principles and the highest standards of information integrity at the core of all our work. We’ve been preparing for this moment since early last year, and you’re going to see a lot from us in the coming few months across three big areas of opportunity.<\/p>

First, large models. We’ve published extensively about LaMDA and PaLM, the industry’s largest, most sophisticated model, plus extensive work at DeepMind.<\/p>

In the coming weeks and months, we’ll make these language models available, starting with LaMDA, so that people can engage directly with them. This will help us continue to get feedback, test and safely improve them. These models are particularly amazing for composing, constructing and summarizing. They will become even more useful for people as they provide up-to-date, more factual information.<\/p>

And in Search, language models like BERT and MUM have improved Search results for four years now, enabling significant ranking improvements and multimodal search like Google Lens. Very soon, people will be able to interact directly with our newest, most powerful language models as a companion to Search in experimental and innovative ways. Stay tuned.<\/p>

Second, we’ll provide new tools and APIs for developers, creators and partners. This will empower them to innovate and build their own applications, and discover new possibilities with AI, on top of our language, multimodal and other AI models.<\/p>

Third, our AI is a powerful enabler for businesses and organizations of all sizes, and we have much more to come here. There’s a few flavors of this.<\/p>

Google Cloud is making our technological leadership in AI available to customers via our Cloud AI Platform, including infrastructure and tools for developers and data scientists, like Vertex AI. We also offer specific AI solutions for sectors like manufacturing, life sciences and retail, and will continue to roll out more.<\/p>

Workspace users benefit from AI-powered features, like Smart Canvas for collaboration and Smart Compose for creation; and we’re working to bring large language models to Gmail and Docs. We’ll also make available other helpful generative capabilities, from coding to design and more.<\/p>

And for our advertising partners, Philipp will discuss in detail how AI is powering dramatic campaign improvements and value-adding features for them.<\/p>

Of course, in addition to all this, AI also continues to improve Google’s other products dramatically. And we’ll continue our work with others outside Google, including joint research collaborations, to develop AI responsibly, and to apply AI to tackle society’s greatest challenges and opportunities. For example, DeepMind’s protein database of all 200 million proteins known to science have now been used by 1 million biologists around the world.<\/p>

We continue to invest in AI across the board, and Google AI and DeepMind are integral to a bright AI-first future. Over the past few years, DeepMind has been increasingly working across groups within Google and the Other Bets; and to reflect that progress, we’ll be making a financial reporting change that Ruth will share more about in her comments. We are just at the beginning of our AI journey, and the best is yet to come.<\/p>

The second thing I wanted to discuss is our sharpened focus. We’re committed to investing responsibly, with great discipline, and to finding areas where we can operate more cost effectively. We are focused on methodically building financially sustainable, vibrant, growing businesses across Alphabet.<\/p>

For example, we’re working to improve the economics in Hardware as we focus more intently on the Pixel line, and our overall cost structure there. Cloud remains very focused on its path to profitability. And there are many opportunities to build on our progress at YouTube over the years, starting with Shorts monetization.<\/p>

Overall, I see this as an important journey to re-engineer the company’s cost base in a durable way. There are several dimensions already underway, including prioritization of our product investments across Google and Other Bets.<\/p>

It also includes a careful focus on our hiring needs, reflecting these priorities; as well as efficiencies in our technical infrastructure and productivity improvements from our AI tools. As part of this, we did a rigorous review across product areas and functions to ensure that our people and roles are aligned with our highest priorities as a company, and we announced a reduction in our workforce. I’m grateful to the Googlers leaving us for all of their contributions and their hard work to help people and businesses everywhere.<\/p>

Let me give a few quick updates from across the business this quarter.<\/p>

Just this week, we started bringing revenue sharing to YouTube Shorts, which is now averaging over 50 billion daily views, up from the 30 billion I announced on the Q1 2022 call. This will reward creators and help improve the Shorts experience for everyone.<\/p>

Our subscription business continues to grow, with YouTube Music and Premium surpassing 80 million subscribers, including trialers. Together with YouTube Primetime Channels subscriptions and YouTube TV, we have good momentum here. YouTube’s NFL Sunday Ticket will accelerate that by helping to drive subscriptions, bring new viewers to YouTube’s paid and ad-supported experiences and create new opportunities for creators.<\/p>

Turning to Hardware. Many outlets and reviewers named Pixel 7 Pro the “phone of the year.” Features like Magic Eraser and Photo Unblur are incredible and help differentiate Pixel from others. 2022’s Pixel 6a, 7 and 7 Pro, are the best-selling generation of phones we’ve ever launched. And we gained share in every market we operate in this year.<\/p>

Next, Google Cloud. We see continued momentum with Q4 revenue growing 32%. Our differentiated products and focused go-to-market strategy continue to drive customer momentum, beginning with real-time data, analytics and AI. Customers are increasingly choosing BigQuery because we unify data lakes, data warehouses, and advanced AI\/ML into one system, and now analyze over 110 terabytes of data per second. Customers like Kroger can analyze data in multiple clouds without moving data in most cases, and MSCI processes unstructured and structured data at scale.<\/p>

In infrastructure, our global network and advanced TPU v4 AI supercomputer helps Snap triple the throughput for its business-critical, ad-ranking workload while significantly lowering cost. Our machine learning infrastructure with Cloud TPU v4 Pods can run large scale training workloads up to 80% faster than alternatives according to third party benchmarks, which is helping customers like Bayer accelerate drug discovery. Our reliability advantages and open edge cloud power the mission-critical 5G network of Telefonica Germany.<\/p>

As I mentioned, our suite of AI\/ML solutions across verticals are a key differentiator. We help Wells Fargo automate the customer service experience for mobile users and HCA continually improve the quality of patient care.<\/p>

In 2022, Mandiant, which we are now integrating, helped over 1800 customers prepare for, or recover from, the most critical cybersecurity incidents.<\/p>

In Workspace, the innovations mentioned earlier are helping drive new wins and expansions across geographies.<\/p>

In Other Bets, from Calico to Waymo, we’re focused on investing sustainably across the portfolio and creating good businesses. Verily, for example, has recently honed its strategy and structure to more clearly focus its product development.<\/p>

To close, we’re all standing on the cusp of an era of amazing opportunities. We’re going to be bold, responsible and focused as we move into it. A “healthy disregard for the impossible” has been core to our company culture from the very beginning. When I look around Google today, I see that same spirit and energy driving our efforts. Thanks to our employees, our partners and people everywhere who use our services. I’m excited for what’s next.<\/p>

Over to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar.<\/p>

Hello, everyone. It’s good to be with you all. I’ll start today with our Google Services performance in the fourth quarter and then dive deeper into our priority areas.<\/p>

Google Services revenues of $68 billion were down 2% year-on-year, negatively affected by a sizable foreign exchange headwind.<\/p>

In Google Advertising, Search and Other revenues were down 2% year-over-year, and YouTube Ads and Network had high single-digit revenue declines.<\/p>

Google Other Revenues were up 8% year-over-year, with strong growth in YouTube non-advertising and Hardware revenues, offset by a decrease in Play revenues.<\/p>

I’ll highlight two other factors that affected our Ads business in Q4. Ruth will provide more detail. In Search & Other, revenues grew moderately year-over-year excluding the impact of FX, reflecting an increase in Retail and Travel, offset partially by a decline in Finance. At the same time, we saw a further pullback in spend by some advertisers in Search in Q4 versus Q3. In YouTube and Network, the year over year revenue declines were due to a broadening of pullbacks in advertiser spend in the fourth quarter.<\/p>

I’ll now zoom out to share more broadly where we’re investing and see clear opportunities for long-term growth.<\/p>

First, Google AI. It’s important to recognize that our advertising business has obviously benefited over the past decade from the transition to mobile. More recently, we had outsized growth in advertising revenues during the pandemic, with 2022 advertising revenues $90 billion higher than in 2019. Going forward, we’re focused on growing revenues on top of this higher base through AI-driven innovation.<\/p>

Sundar highlighted the incredible opportunities underway with AI and the transformative impact it will have on businesses. Already breakthroughs in everything from natural language understanding to generative AI are fueling our ability to deliver results that drive meaningful performance for advertisers and are useful to users.<\/p>

Take Smart Bidding, which uses AI to predict future ad conversions and their value, helping businesses stay agile and responsive to rapid shifts in demand. In 2022, AI advances boosted bidding performance, allowing us to move advertiser outcomes down the funnel to drive better ROI and use budgets more efficiently.<\/p>

In search-query matching, large language models like MUM match advertiser offers to user queries. This understanding of human intent of language combined with advances in bidding prediction, are why businesses can see an average of 35% more conversions when they upgrade exact match keywords to broad match in campaigns that use a target CPA.<\/p>

Google AI also underlies our Creative products, like text suggestions in Google Ads and creative optimization in responsive search ads. We’re excited to start testing our Automatically Created Assets Beta, which uses AI to generate headlines and descriptions for Search creatives seamlessly once advertisers opt in.<\/p>

Then, of course, there’s Performance Max, which offers the best combination of our AI-powered systems to our customers. But we’re not stopping here, and these examples aren’t exhaustive. AI has been foundational to our ads business for the last decade, and we’ll continue to bring cutting edge advances to our products to help businesses and users.<\/p>

Number two, retail. Our foundation for delivering value over the long term includes three pillars.<\/p>

First, we’re on a multiyear mission to make Google a core part of shopping journeys for consumers and a valuable place for merchants to connect with users. This means constantly improving our consumer experiences, starting with a more visual, immersive, browsable Search.<\/p>

Second, we’re empowering more merchants to participate in our free listings and ad experiences. In 2022, we saw an uptick in merchants, particularly SMBs, and product inventory coming onto Google. Adding more value for merchants remains a top priority.<\/p>

Third, to drive retail performance further, we focus on great ads products. From automation and insights, to bidding tools and omnichannel solutions to AI powered campaigns like PMax, we’re helping retailers hit their goals and connect with customers no matter where or when they shop.<\/p>

Two quick insights on PMax, which we upgraded the majority of advertisers to from Smart Shopping campaigns last year. First, advertisers, on average, see a 12% uplift from SSC to PMax. Second, it was a success story during the holidays and Cyber 5, its ability to scale and adapt to changing traffic over a volatile peak retail season drove strong results for many retailers, particularly mid-market advertisers.<\/p>

Moving on to YouTube. Despite ongoing revenue headwinds in Q4, we’re confident in YouTube’s long-term trajectory. Here’s how we think about our strategy.<\/p>

It all starts with the creator ecosystem. Creators are the lifeblood of YouTube. In 2022, more people created content on YouTube than ever before. Long-form, short-form, audio, podcasts, music, livestreams what sets YouTube apart is we give creators more ways to create content and connect with fans and more ways to earn money than any other platform. More creators, means more content, means more viewers, which leads to more opportunities for advertisers.<\/p>

The creator ecosystem and our multiformat 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 a large screen; number three, investing in our subscription offerings; and, number four, a long[er]-term effort to make YouTube more shoppable.<\/p>

First, Shorts. Viewership is growing rapidly, as Sundar said, 50 billion plus daily views. We’re also still pleased with our continuing progress in early monetization. On the creator side, it’s been impressive to see the innovative ways creators are using Shorts to introduce their content and extend existing channels. We’re focused on providing creators with the best content creation and monetization tools, new, richer features, and analytics capabilities that help individualize and optimize their content strategies. It’s early days for Shorts, but we’re confident the runway is long.<\/p>

Next, Connected TV, where users are increasingly watching their favorite creators on the big screen at home. According to Nielsen, YouTube is the leader in U.S. streaming watch time. Advertisers are leaning in. With AI powered solutions, we’re helping brands deliver efficient reach and ROI and address pain points like frequency and measurement.<\/p>

Then there’s our subscription offerings. It’s clear the future of online video is about helping users seamlessly discover and watch content across ad-supported and premium services. Our goal is to be a one stop shop for multiple types of video content.<\/p>

That’s why we first offered YouTube Music & Premium, where 80 million-plus paid subscribers and trialers enjoy their favorite content and music ads-free.<\/p>

We then expanded into YouTube TV, significantly improving on the legacy television experience.<\/p>

Then last fall, Primetime Channels launched, making streaming subscription services available on YouTube on an a la carte basis.<\/p>

Given the potential we see in our subscription offerings, we recently announced a multiyear agreement to distribute NFL Sunday Ticket. As Sundar highlighted, we’re excited about the opportunities this will open up.<\/p>

Lastly is our focus on a shoppable YouTube. It’s still nascent, but we see lots of potential in making it easier for people to shop from the creators, brands and content they love.<\/p>

I’ll close with something I’ve said many times before: our success is only possible because of our customers and partners. The reality is we only do well when they do well. Since our earliest days, our revenue share models have been structured around ROI for our partners, from Play developers and online publishers to YouTube creators, artists and media orgs around the world. Over the last three years, I’m proud to share that we’ve contributed more than $200 billion to these key ecosystems. We remain as committed as ever to fueling the next generation of businesses, media companies, and creativity on the web.<\/p>

On that note, a big thank you to our partners and customers for their ongoing collaboration and trust. And to Googlers for their energy, focus and dedication to helping our users, customers, and partners succeed, especially through these tougher times.<\/p>

Ruth, over to you.<\/p>

Ruth Porat, CFO Alphabet and Google: Thank you, Philipp.<\/strong><\/p>

For the full year 2022, Alphabet delivered revenues of $283 billion, up 10% versus 2021 and up 14% on a constant currency basis – adding $37 billion to revenues excluding the impact of foreign exchange.<\/p>

I will briefly cover the main points of our fourth quarter results, and then turn to our outlook to give you more context for Sundar’s comments on how we are focused on investing for growth, as well as on re-engineering our cost base for long-term success.<\/p>

For the fourth quarter, our Consolidated Revenues were $76 billion, up 1%, or up 7% in constant currency. Search remained the largest contributor to revenue growth on a constant currency basis.<\/p>

Our total cost of revenues was $35.3 billion, up 7%.<\/p>

Other Cost of Revenues of $22.4 billion were up 15%. The increase was driven by two factors. First, Hardware costs, due primarily to $1.2 billion in inventory-related charges; and secondarily, to strong unit sales. The charges reflect ongoing pricing pressures and changes in expected future inventory needs. Second, costs associated with data centers and other operations.<\/p>

Operating expenses were $22.5 billion, up 10%, reflecting an increase in R&D expenses, primarily driven by headcount growth; followed by an increase in G&A expenses, primarily reflecting an increase in charges related to accrued legal matters.<\/p>

These increases were partially offset by a decline in sales and marketing expenses, primarily due to lower advertising and promotional spend.<\/p>

Operating income was $18.2 billion, down 17% versus last year, and our operating margin was 24%.<\/p>

Net income was $13.6 billion.<\/p>

We delivered Free Cash Flow of $16 billion in the fourth quarter and $60 billion in 2022. We ended the year with $114 billion in cash and marketable securities. We also repurchased a total of $59 billion of our Class A and Class C shares in 2022.<\/p>

Turning to our segment results, starting with Google Services, Revenues were $67.8 billion, down 2%. Google Search and Other advertising revenues of $42.6 billion in the quarter were down 2%. Search delivered moderate underlying growth in Q4, absent the impact of currency movements on reported results. YouTube advertising revenues of $8 billion, were down 8%. Network advertising revenues of $8.5 billion, were down 9%.<\/p>

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 two 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.<\/p>

TAC was $12.9 billion, down 4%.<\/p>

Google Services Operating income was $21.1 billion, down 19%, and the operating margin was 31%.<\/p>

Turning to the Google Cloud segment, revenues were $7.3 billion for the quarter, up 32%. Revenue growth in GCP was again greater than Google Cloud, reflecting strength in both infrastructure and platform services. Google Workspace’s strong results were driven by increases in both seats and average revenue per seat. In Q4, we saw slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop. Google Cloud had an Operating Loss of $480 million.<\/p>

As to our Other Bets, for the full year 2022, revenues were $1.1 billion and the operating loss was $6.1 billion.<\/p>

Turning to our outlook for the business. In 2022, our year-on-year revenue growth was affected by a number of challenges. First, we faced very tough comps given the outsized recovery in 2021 from the impact of the pandemic. Second, foreign exchange headwinds grew throughout the year. And third, we were operating against the backdrop of a more challenging economic climate that also impacted many of our customers and which remains ongoing.<\/p>

Within Google Services, we are focused on investing in the opportunities we see for long-term revenue growth.<\/p>

First, within Advertising, we are focused on using advances in AI to drive new and better experiences for users in Search, as well as to deliver better measurement, higher ROI and tools for more compelling creative content to advertisers.<\/p>

In YouTube, we are prioritizing continued growth in Shorts engagement and monetization, while also working on other initiatives across our ad-supported products.<\/p>

As to our outlook for Other Revenues, in Play, 2022 results reflected the particularly sizable impact from foreign exchange, lapping the uplift in user activity during the pandemic and the impact from the fee reductions we introduced. We remain optimistic about the longer-term prospects for mobile apps and gaming, although remain more cautious near term given industry trends.<\/p>

With YouTube subscriptions, we are optimistic about building on its momentum across YouTube Music Premium, YouTube TV, and Primetime Channels.<\/p>

In Hardware, we continue to make sizable investments, particularly to support innovation across our Pixel family, while working to drive greater focus and cost efficiencies across the portfolio.<\/p>

For Google Cloud, we remain excited about the long-term market opportunity and the trajectory of the business. Enterprises and governments are increasingly turning to us for their digital transformation initiatives across verticals and geographies. While investing for growth, we remain very focused on Google Cloud’s path to profitability.<\/p>

In terms of Other Bets, as Sundar mentioned, we will be making a financial reporting change as it relates to DeepMind. To reflect the increasing DeepMind collaboration with Google Services, Google Cloud and Other Bets, beginning in the first quarter, DeepMind will no longer be reported in Other Bets and will be reported as part of Alphabet’s corporate costs.<\/p>

I’ll now walk you through the key elements of our efforts to deliver a durable re-engineering of our cost base in order to slow the pace of operating expense growth. We expect the impact will become more visible in 2024.<\/p>

First, with respect to Alphabet headcount, we are meaningfully slowing the pace of hiring in 2023, while still investing in priority areas. In Q4, we added 3,455 people. As in prior quarters, the majority of hires were for technical roles.<\/p>

With respect to our recent announcement that we are reducing our workforce by approximately 12,000 roles, most of the impact will be seen in Q1. We will take a severance charge of $1.9 to $2.3 billion, which will be reported in corporate costs.<\/p>

We will continue hiring in priority areas, with a particular focus on top engineering and technical talent, as well as on the global footprint of our talent.<\/p>

Second, we have a longer-term effort underway to re-engineer our cost base in three broad categories.<\/p>

First, using AI and automation to improve productivity across Alphabet for operational tasks as well as the efficiency of our technical infrastructure. Second, managing our spend with suppliers and vendors more effectively; and, third, optimizing how and where we work.<\/p>

In the first quarter of 2023, we expect to incur approximately $500 million of costs related to exiting leases to align our office space with our adjusted global headcount [out]look [sic]. This will be reflected in corporate costs. We will continue to optimize our real estate footprint.<\/p>

Turning to capex, for 2023 we expect total capex to be generally in line with 2022, with an increase in Technical Infrastructure versus a decline in office facilities. Our ongoing investment in technical infrastructure is obviously a critical component of supporting our long-term growth opportunities.<\/p>

Finally, I will point you to our earnings release in which we noted that we adjusted the estimated useful lives of servers and certain network equipment starting in Q1 ’23. We expect these changes will favorably impact our 2023 operating results by approximately $3.4 billion for assets in service as of year-end 2022.<\/p>

Thank you. Sundar, Philipp and I will now take your questions.<\/p>

Operator:<\/strong> Thank you. As a reminder, to ask a question, you will need to press *11 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>

And our first question comes from Brian Nowak with Morgan Stanley. Your line is open.<\/p>

Brian Nowak (Morgan Stanley): <\/strong>Thanks for taking my questions. I have two. The first one around AI and sort of the cost of AI. I appreciate all the color about all the AI tools that are to come. I guess first question is: How should we think about the potential impact on capex and the higher compute intensity of these AI tools to come, potentially impacting margins over the next couple years?<\/p>

And then the second one, Ruth, really appreciate the conversation about long-term efforts underway to improve efficiency. How should we think about potential impacts of those efforts in ’23 and in ’24? Have you sort of run -- any sizes of what types of savings we could see roll through the P&L over that period? Thanks.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Thanks for the question.<\/p>

So starting on your question about AI and capex. As I think Sundar and Philipp both noted, AI is already incorporated in many of our products, products like Performance Max and Smart Bidding and Cloud. As Sundar said, it is more compute-intensive, but also opens up many more services and products for our users, for creators, for advertisers.<\/p>

That being said, we’re very focused on further optimizing the cost of compute, and that’s across all elements: data centers, servers and our supply chain. So we’re continuing to invest with a keen lens on the return on that capital.<\/p>

And as I indicated in opening comments, when we look at capex for 2023, we do expect it’s going to be generally in line with 2022 with an important mix shift. We’re increasing our investments in technical infrastructure. And that’s not just for AI, that’s to support investments across Alphabet; in particular, in Cloud as well. And at the same time, we are meaningfully decreasing our capex for office facilities.<\/p>

And then with respect to the overall efficiency opportunities, very keen focus on the three areas that I noted, and one of the key elements of it is using AI and automation to improve productivity and efficiency of our technical infrastructure.<\/p>

We noted that we want to be focused and that we are focused on durable improvements to our expense base. And that’s because if you go through the items, the work streams that we have in flight, they take longer to implement, execute. They’re in process now and they continue to build on themselves and continue to provide added upside as we go through time, which is why I indicated you would see more of an impact on 2024 than in 2023. But we’re continuing to work through them.<\/p>

Brian Nowak (Morgan Stanley):<\/strong> Great. Thanks, Ruth.<\/p>

Operator:<\/strong> And our next question comes from Michael Nathanson with Nathanson.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Thanks. I have two. For Sundar and Philipp, you both mentioned the NFL in your remarks and the opportunities it opens up. Can you comment and help us define what do you see as that longer-term opportunity? Why is it so critical to have the NFL? And is this the first of many sports rights deals you have? So anything to just help us – why this is so important to you.<\/p>

And then, Philipp, you said in the past about the scaling of monetization of YouTube Shorts. What are the sticky factors? What is taking the time to really bring advertisers on? What are some of the things you’ve seen, heard, or that you solved to make this a more quickly monetizable product? So thank you.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yeah, thank you so much for the question. We think there is a lot of great opportunities to differentiate the user and creator experience with our unique capabilities.<\/p>

It basically means that every YouTube viewer who is interested in the NFL can now have one-click access to the full offering of Sunday Ticket as an add-on package on a YouTube TV subscription, and as a standalone offering on Primetime Channels. This will be the first time Sunday Ticket is actually available a la carte for fans.<\/p>

On YouTube TV, we are building the ability for subscribers to, for example, watch multiple screens at once. And on YouTube CTV, we will be adding new features specific to the Sunday Ticket experience, like comments, chats, polls, and so on.<\/p>

On the creator side, imagine all the innovative ways they can create with exclusive NFL content, behind-the-scenes event access and so on. And we are really excited to see what they’ll do across long form, Shorts, live streams and more.<\/p>

On your second question, on the Shorts side, as I said earlier, viewership is growing rapidly:
50 billion-plus daily views up from 30 billion last spring. We are still pleased with our continuing progress in monetization. Closing the gap between Shorts and long-form is a big priority for us; as is, of course, continuing to build a great creator and user experience which we’re paying a lot of attention to.<\/p>

Ads on Shorts are now available -- it gives you a bit of a sign for the progress. You have Video Action, App, Discovery, Performance Max campaigns -- and via product feeds, Shorts are also shoppable. And again, we’re the only destination where creators can produce all forms of content across multiple formats, across multiple screens, and really with multiple ways to make a living.<\/p>

And Sundar shared just yesterday we brought revenue sharing to Shorts via our YouTube Partner Program. And ultimately our goal is to make YouTube the best place for Shorts and creators, and that’s really what our focus is at the moment.<\/p>

Operator:<\/strong> And our next question comes from Douglas Anmuth with JPMorgan. Your line is open.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Thanks for taking the questions. One for Sundar and one for Ruth.<\/p>

For Sundar, could 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?<\/p>

And then, Ruth, clearly the language around re-engineering the cost structure in a durable way and everything that went along with it is different than what we’ve heard in the past. Is there any way at all to help us quantify how you’re thinking about these efforts? Thanks.<\/p>

Sundar Pichai, CEO Google:<\/strong> Thanks, Doug.<\/p>

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.<\/p>

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.<\/p>

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. So I view it as very, very early days, but we are committed to putting out experiences, both in terms of new products and experiences; actually bringing direct LLM experiences in Search; making APIs available for developers and Enterprises; and learn from that and iterate like we’ve always done. So I’m looking forward to it.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> 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.<\/p>

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.<\/p>

And then very importantly, on expense growth, we have a very strong commitment to, we keep emphasizing, durably re-engineer our cost base. And that will benefit all of the segments across Alphabet.<\/p>

And the key components, slowing the pace of hiring as a starting point; product prioritization across Google, as Sundar said, is key; improving economics in Hardware as we focus intently on the Pixel line and cost structure.<\/p>

Then using AI and automation to improve productivity for operational tasks, as well as for the efficiency of our technical infrastructure, where we have a number of work streams.<\/p>

Managing our spend, as I said, with suppliers and vendors; and then optimizing how and where we work. And you saw part of that with the real estate consolidation given the slower headcount growth.<\/p>

All of those not only benefit Google Services, but many of those similarly drive a greater efficiency across Alphabet. And so as we’ve said, in Cloud we remain very focused on the path to profitability. That’s a revenue and margin driver. And then with Other Bets, we’re similarly focused on investing sustainably.<\/p>

And so to go back to it, the durable nature of change and some of the elements that I’ve talked about here where work is ongoing, you start to see impacting in ’23; but to really get full-year run rate and the benefit of it, there’s work ongoing. And that’s why we’ve emphasized this notion of it comes in and really you see the run rate in ’24.<\/p>

Doug Anmuth (JPMorgan):<\/strong> That’s helpful. Thank you, both.<\/p>

Operator: <\/strong>Our next question is from Eric Sheridan with Goldman Sachs. Your line is open. <\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thank you so much. Maybe two, if I could.<\/p>

Sundar, for you, continuing on the AI theme, how do you think philosophically about capturing the opportunity set that you see in front of you, given all the investments you’ve made over the last 5+ years that we’ve been talking about – going back to a lot of Google I\/Os; versus potentially disrupting the user experience or the monetization arc in your existing product set, and striking the right balance between the opportunity set and being disruptive to yourself, when you think about looking forward over the next couple years?<\/p>

And then, Ruth, maybe just following on some of the questions and debates on the cost structure. Obviously Other Bets is an area where the losses continue to be sort of higher than what some of us think from the outside looking in, but then you showed some improvement in the losses in the Cloud division this quarter. How should we be thinking about the rationalization of the cost structure and aligning costs with opportunity sets across some of the divisions of Alphabet when you think from the medium to the long term? Thanks so much.<\/p>

Sundar Pichai, CEO Google:<\/strong> Thanks, Eric.<\/p>

Look, I do think, first of all, I mean, it’s such a foundational technology. And we’ve been investing not just in terms of research but actually getting it all production-scale ready.<\/p>

We have already deployed – if you look at the impact of things like BERT and MUM have had on search quality, making search multimodal, driving the usage of products like Google Lens, I feel like we’ve been scaling up well.<\/p>

In Google Cloud today with Vertex AI, we’ve already been bringing AI APIs to Enterprises, and they are on a pretty healthy growth path.<\/p>

So we do see secular opportunities ahead, both in terms of putting these APIs out, making sure every developer, every organization in the world can use it. And as I said earlier, we’re in very, very early days. And I think there’s a lot of room ahead.<\/p>

In terms of Search, too, now that we can integrate more direct LLM-type experiences in Search, I think it will help us expand and serve new types of use cases, generative use cases. And so I think I see this as a chance to rethink and reimagine and drive Search to solve more use cases for our users as well.<\/p>

So, again, early days. You will see us be bold, put things out, get feedback, and iterate and make things better.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> And then in terms of your question about Other Bet 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.<\/p>

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. As I’ve said on prior calls, there is no monolithic approach across the portfolio, but we are very focused on what’s the pace of investment opportunities for monetization and commercialization.<\/p>

And just a bit more with respect to the DeepMind move. To be very clear, we consolidate an Other Bet into Google only when that Bet supports products and services within Google, or for Alphabet broadly. And you saw us do that some time ago when we moved Chronicle, as an example, into combining with our Cloud business and really the cybersecurity offering that is now in Cloud. And that was very effective.<\/p>

With AI, this is obviously an Alphabet strategic priority, and we see huge opportunity ahead. And DeepMind’s research is core to that future across the product areas in Alphabet’s portfolio.<\/p>

And so this reporting change reflects the strategic focus in DeepMind, the support of each one of our segments. And that’s why I indicated that beginning Q1, DeepMind financials will be reported within our corporate costs segment.<\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thanks so much.<\/p>

Operator:<\/strong> Our next question from Justin Post with Bank of America-Merrill Lynch. Your line is open.<\/p>

Justin Post (BoA-Merrill Lynch):<\/strong> Thank you for taking my question. Just digging into Search, kind of low single digit growth ex-FX, can you talk about the pressures there of volume versus pricing or CPCs? What’s really driving the slowdown? It’s kind of almost back to
2009 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? Thank you.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> So overall, as we’ve indicated, we remain very excited about all that we’re doing in Search, the utility for all of us. And so that’s why you’ve heard so many comments about the application of AI and what that means for the ongoing opportunity.<\/p>

You had a number of different questions in there. I think one was on volumes. And in the 10-K that we’ll be filing shortly, you’ll see that for the full year 2022, CPCs were down 1% versus last year. And as we’ve talked about in prior quarters, the change in CPCs can reflect a number of different factors: geographic mix, property mix, all sorts of things.<\/p>

Clicks were up 10% in 2022, reflecting a number of factors, including increased engagement primarily on mobile devices and improvements in ad formats. But I think overall, we’re really excited about what we see ahead. We’re not going to predict the global environment. We did say the challenging backdrop is ongoing.<\/p>

And you can see that, but we’re very focused on what we can control. And I think most important, and what we’re really excited about here, is innovation to help advertisers overall and our cost re-engineering that really gets us to align this long-term sustainable value creation.<\/p>

Justin Post (BoA-Merrill Lynch):<\/strong> Thank you.<\/p>

Operator:<\/strong> Our next question is from Ross Sandler with Barclays. Your line is open.<\/p>

Ross Sandler (Barclays):<\/strong> Yeah, just a question on the Hardware business. Pixel’s doing quite well, but it seems like there’s 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? Thanks a lot.<\/p>

Sundar Pichai, CEO Google:<\/strong> Thanks, Ross. First of all, very, very pleased with how Pixel has performed through a challenging macroenvironment.<\/p>

Look, I think our computing portfolio is incredibly important. It’s what allows -- us to -- for us to invest and drive innovation forward. You have to put it all together as a product and ship it. And I think it ends up playing a very, very big role in guiding the ecosystem as well.<\/p>

And increasingly, I think users are thinking beyond phones and thinking through a holistic ecosystem. To give one example, us undertaking Pixel Watch, and as part of that integrating Fitbit and bringing it to our ecosystem as well. Partnering closely with Samsung on WearOS. The combination is what has driven over a 300% increase in actives on Android Watch’s ecosystem, so just to give you a context on that.<\/p>

So we are very thoughtful about how we are approaching this area. And as Ruth mentioned, across all these areas, too, we are working to drive greater focus and cost efficiencies in the portfolio.<\/p>

Obviously, we worked through a challenging supply chain environment, as well as a challenging environment on the demand side. And so we’ll continue focusing on improving all of this in a durable way.<\/p>

Operator:<\/strong> And our next question comes from Mark Mahaney with Evercore ISI. Your line is open.<\/p>

Mark Mahaney (Evercore ISI):<\/strong> I’ll just ask one question. Ruth, you mentioned a couple of times getting Google Cloud to profitability. And can you just talk through how that gets done? You had almost 40% growth in Google Cloud. Operating loss level stayed about the same from ’21 to ’22, so the growth is there.<\/p>

What are the factors that need to be solved in order to get pretty nice profitability out of that segment, sort of anywhere akin to what Azure and AWS have been able to show over the years? Thank you.<\/p>

Ruth Porat, CFO Alphabet and Google: <\/strong>Thanks for the question.<\/p>

So as we’ve talked about on prior calls, with Google Cloud, we’ve really been investing ahead of our revenues, given the growth in 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 investment to position ourselves to really have the momentum that the team has continued to deliver.<\/p>

That being said, they are, as both Sundar and I have noted, extremely focused on the path to profitability and every element of that. And some of the items that I noted that benefit Alphabet generally most certainly are relevant here for Cloud as well. Everything from our efficiency with our technical infrastructure, which we’re very excited about; all the efforts that they’re doing there and more broadly.<\/p>

So this has been really to ensure, first and foremost, given the scale of the opportunity and the speed with which it’s moving, that we’re positioned to be present with our customers, to provide them with the analytics, the skills, the capabilities that are needed to build for long-term growth.<\/p>

And we’re at a position now where we’ve meaningfully closed the gap to profitability but still are working through as we continue to invest for growth, while narrowing what this is on our march to profitability.<\/p>

Mark Mahaney (Evercore ISI): <\/strong>Thank you, Ruth.<\/p>

Operator:<\/strong> And our last question comes from Brent Thill with Jefferies. Your line is open.<\/p>

Brent Thill (Jefferies):<\/strong> Good afternoon. 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 one month into the year, can you give us any color in terms of how you’re framing this quarter?<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> So I think as you know well, we don’t provide exit run rates. What we try to do is give you the context within which we’re approaching the overall business and the priorities that we have as we’re looking at revenue upside and the growth levers there, as well as how to re-engineer our expense base to deliver attractive return.<\/p>

So not really much to add to the comments that you’ve heard to date, and we’re continuing to execute across each one of the elements we discussed.<\/p>

Brent Thill (Jefferies):<\/strong> Thank you.<\/p>

Operator:<\/strong> Thank you. And that concludes our question and answer session for today.<\/p>

I’d like to turn the conference back over to Jim Friedland for any further remarks.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>Thanks everyone for joining us today.<\/p>

We look forward to speaking with you again on our first quarter 2023 call. Thank you and have a good evening.<\/p>

Operator:<\/strong> Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.<\/p>

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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.

Operator:<\/strong> Welcome, everyone. Thank you for standing by for the Alphabet first quarter 2023 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. To ask a question during this session, you will need to press *1 on your telephone. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>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.<\/p>

Now I’ll quickly cover the Safe Harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such 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 most recent Form 10-K filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor. Our comments will be on year-over-year comparisons unless we state otherwise. And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google<\/strong>: Thank you, Jim. And good afternoon, everyone.<\/p>

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.<\/p>

On Cloud, we continue to be on a long and exciting journey to build that business. Cloud delivered profitability this quarter, and we remain focused on long-term value creation here.<\/p>

Today, I’ll give an update on the two 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.<\/p>

First, the incredible AI opportunity -- for consumers, our partners and for our business. I’ve compared it to the successful transition we made from desktop to mobile computing over a decade ago.<\/p>

Our investments and breakthroughs in AI over the last decade have positioned us well. In our last call, I outlined three 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. We have made good progress across all three areas.<\/p>

In March, we introduced our experimental conversational AI service called Bard. We’ve since added our PaLM model to make it even more powerful, and Bard can now help people with programming and software development tasks, including code generation. Lots more to come!<\/p>

For developers, we’ve released our PaLM API alongside our new MakerSuite tool. It provides a simple way to access our large language models and begin building new Generative AI applications quickly.<\/p>

A number of organizations are using our Generative AI large language models across Google Cloud Platform, Google Workspace, and our cybersecurity offerings.<\/p>

For years, we’ve been focused on making Search even more helpful. From Google Lens to multisearch to visual exploration in Search, Immersive View in Maps, Google Translate, to all the language models powering search today, we have used AI to open up access to knowledge in powerful ways.<\/p>

We’ll continue to incorporate Generative AI advances to make Search better in a thoughtful and deliberate way. We’ll be guided by data and years of experience about what people want and our high standards for quality. And we will test and iterate as we go, because we know that billions of people trust Google to provide the right information.<\/p>

As it evolves, we’ll unlock entirely new experiences in Search and beyond, just as camera, voice and translation technologies have all opened entirely new categories of queries and exploration.<\/p>

AI has also been foundational to our Ads business for over a decade. Products like Performance Max use the full power of Google’s AI to help advertisers find untapped and incremental conversion opportunities. Philipp will talk more about this in a moment.<\/p>

And as we continue to bring AI to our products, our AI Principles and the highest standards of information integrity remain at the core of all our work. <\/p>

As one example, our Perspective API helps to identify and reduce the amount of toxic text that language models train on, with significant benefits for information quality. This is designed to help ensure the safety of Generative AI applications before they are released to the public.<\/p>

We’re proud to have world-class research teams who have been advancing the breakthroughs underpinning this new era of AI. Last week I announced that we’re bringing together the Brain team in Google Research and DeepMind into one unit. Combining all this talent into one focused team, backed by the pooled computational resources of Google, will help accelerate our progress and develop the most capable AI systems safely and responsibly.<\/p>

On to my second theme, the company’s sharpened focus. I spoke last quarter about our commitment to invest responsibly and with discipline and to find areas where we can operate more cost effectively and with greater velocity.<\/p>

We have significant multi-year efforts underway to create savings, such as improving machine utilization and finding more scalable and efficient ways to train and serve machine learning models.<\/p>

We are making our data centers more efficient, redistributing workloads and equipment where servers aren’t being fully used. This is important work as we continue to significantly invest in infrastructure to drive our many AI opportunities.<\/p>

Improving external procurement is another area where data suggests significant savings, and this work is underway. And we are taking concrete steps to manage our real estate portfolio to ensure it meets our current and future needs. We will continue to use data to determine additional areas for durable savings.<\/p>

Next, Google Cloud. I’m pleased with the ongoing momentum in Cloud. Our disciplined expansion of our product roadmap and Go-To-Market organization has helped to build one of the largest enterprise software companies in the world. We have consistently grown top-line revenues and improved annual operating margins, and we continued to do so this quarter.<\/p>

Our growth has come from our deep relationships with large enterprises, our strong partner ecosystem and our product leadership.<\/p>

Over the past three years, GCP’s annual deal volume has grown nearly 500%, with large deals over $250 million, growing more than 300%. Nearly 60% of the world’s 1,000 largest companies are Google Cloud customers.1<\/sup> And many leading startups and millions of small and medium enterprises use Google Cloud.<\/p>

We have also built a strong partner ecosystem. Over the last four years, the number of Google Cloud partner certified practitioners around the world has increased more than 15 times. The largest global system integrators have built 13 dedicated practices with Google Cloud, compared to zero when we started. And today, more than 100,000 companies are part of our Google Cloud Partner Advantage Program.<\/p>

Our growth is also driven by our product leadership. We are bringing our Generative AI advances to our Cloud customers across our Cloud portfolio. Our PaLM Generative AI models and Vertex AI platform are helping Behavox to identify insider threats; Oxbotica to test its autonomous vehicles; and Lightricks to quickly develop text-to-image features.<\/p>

In Workspace, our new Generative AI features are making content creation and collaboration even easier for customers like Standard Industries and Lyft. This builds on our popular AI-powered Workspace tools - Smart Canvas and Translation Hub - used by more than 9 million paying customers.<\/p>

Our product leadership also extends to data analytics, which provides customers the ability to consolidate their data and understand it better using AI. <\/p>

New advances in our Data Cloud enable Ulta Beauty to scale new digital and omnichannel experiences while focusing on customer loyalty; Shopify to bring better search results and personalization using AI; and Mercedes-Benz to bring new products to market more quickly.<\/p>

We’ve introduced Generative AI to identify and prioritize cyberthreats, automate security workflows and response and help scale cybersecurity teams.<\/p>

Our Cloud cybersecurity products help protect over 30,000 companies, including innovative brands like Broadcom and Europe’s Telepass. We are successfully integrating Mandiant with our products, including Mandiant Threat Intelligence and Breach Analytics. <\/p>

Our open approach to AI development, coupled with our industry-leading TPUs and best-in-class GPUs from NVIDIA, enable innovative companies to tackle any AI workload with speed and flexibility. AI21 Labs, Replit, Midjourney, and many others build and train foundation models and Generative AI platforms.<\/p>

We are the only cloud provider to announce availability of NVIDIA’s new L4 Tensor Core GPU with the launch of our G2 VMs, which are purpose-built for large inference AI workloads such as Generative AI.<\/p>

Turning next to YouTube. Let me start by thanking Susan Wojcicki for her terrific leadership of YouTube for nine years. She recently transitioned into an advisory role with Alphabet this quarter, with Neal Mohan, a longtime leader at Google and YouTube, becoming the new head of YouTube.<\/p>

Here are a few highlights from the quarter. YouTube Shorts continues to see strong momentum with creators. Last year, the number of channels that uploaded to Shorts daily grew over 80%. Those posting weekly on Shorts saw the majority of new channel subscribers coming from their Shorts posts. The Living Room remained our fastest growing screen in 2022 in terms of watchtime, and we’re seeing growth and momentum internationally.<\/p>

On our subscription business, we rolled out several new updates to YouTube Premium. Premium subscribers can now queue videos on phones and tablets, stream continuously while switching between devices, and auto-download recommended videos for offline viewing.<\/p>

And we have great momentum around YouTubeTV and YouTube Primetime Channels. We’ve announced pricing for the NFL Sunday Ticket offering, which will help to drive subscriptions, bring new viewers to YouTube’s paid and ad-supported experiences and create new opportunities for creators.<\/p>

To close, across the company, we are excited about helping people, businesses and society reach their full potential with AI. We’ll share updates at Google I\/O about how we are using AI across our products, including our Pixel devices, and share some exciting new developments for Android.<\/p>

Thanks to our employees around the world who continue to work hard to advance our mission. After nearly 25 years, the work to organize the world’s information and make it accessible and useful is as urgent as ever, and I look forward to the work ahead. <\/p>

Over to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google<\/strong>: Thanks, Sundar. And hey, everyone. It’s great to be here today.<\/p>

I’ll kick off with Google Services performance in the first quarter, then provide color into our key opportunity areas, and then turn it over to Ruth for more on our financial performance. Google Services revenues of $62 billion were up 1% year-on-year, including the effect of a modest foreign exchange headwind.<\/p>

In Google Advertising, Search & Other, revenues grew 2% year-over-year, reflecting an increase in the Travel and Retail verticals, offset partially by a decline in Finance as well as in Media & Entertainment. <\/p>

In YouTube Ads, we saw signs of stabilization in performance, while in Network, there was an incremental pullback in advertiser spend. <\/p>

Google Other revenues were up 9% year-over-year, led by strong growth in YouTube subscriptions revenues.<\/p>

Now, let’s double-click into the three areas I laid out last quarter where we see clear opportunities for long-term growth in advertising. Number one, Google AI. Number two, retail, which cuts across all of our Ads products and surfaces. And number three, YouTube.<\/p>

First, Google AI. I’ve said before, AI has long been an important driver of our business. Advancements are powering our ability to help businesses, big and small, respond in real-time to rapidly changing market and consumer shifts and deliver measurable ROI when it’s needed most.<\/p>

In Q1, we continued to innovate across our products. Take core Search for example. In targeting, we updated Search keyword relevance using the latest natural language AI from MUM models to improve the relevance and performance of shown ads when there are multiple overlapping keywords eligible for an auction.<\/p>

In bidding, we improved our Smart Bidding models to bid more accurately based on differences in search ad formats -- in other words, bid more effectively depending on how a user wants to engage with an ad. <\/p>

In creatives, we opened our Automatically Created Assets beta to all advertisers in English. ACA generates text assets alongside your responsive search ads and uses AI to help reduce the amount of manual work to keep creatives fresh and relevant to a user’s query, context and to the advertiser’s business.<\/p>

To then unlock core Search further and maximize conversions across all of Google, we’re actively helping more advertisers pair it together with Performance Max. Advertisers who use PMax are, on average, achieving over 18% more conversions at a similar CPA. This is up five points in just 14 months thanks to advances in the AI underlying bidding, creatives, search query matching and new formats like YouTube Shorts.<\/p>

I mentioned earlier that travel was a contributor to growth. In March, we launched PMax for travel goals. Now even the smallest hoteliers can benefit from the expanded reach of hotel ads in PMax. Like family-run Corissia Hotels Group, who drove a 32% increase in revenue and a 26% increase in total direct bookings within just one month of using PMax for travel goals. There’s more to come here as we add even more AI-powered features. Stay tuned for more at Google Marketing Live in May. <\/p>

Moving onto Retail, where we had a solid quarter. Our focus is on three 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 listing and Ads experiences. And number three, driving retail performance further with great Ads products.<\/p>

In a macroenvironment of “do more with less,” our tools and solutions are proving that we can deliver value for retailers -- online and omnichannel -- and drive high-value customers, even in challenging times. Caraway, a Direct-to-Consumer maker of cookware, used Target ROAS to uncap budgets and PMax to optimize and deploy spend across Google inventory for its Q4 Black Friday Campaign. PMax drove a 46% increase in revenue and 31% jump in ROAS, leading to Caraway’s best business day in history and a robust re-investment in its AI-first strategy for Q1.<\/p>

For omni-focused retailers, we recently rolled out store sales reporting and bidding in Performance Max for store goals. This is helping retailers go beyond just optimizing to online conversions to also optimize to their stores, reaching and bidding for high-value customers who are more likely to spend in-store.<\/p>

Danish department store Magasin recently used our Store sales solution to boost its omnichannel ROAS 128% versus online-only campaigns. Thanks to dynamic in-store values coming from its first-party data, including its high-value customers, Magasin can now, with confidence, measure the full impact of its online investments on both eCommerce and physical store revenue.<\/p>

Turning to YouTube. Creators fuel YouTube’s success. Across long-form and Shorts, music and podcasts, vertical and horizontal, YouTube is where creators are incentivized to make their best work, which means the best content, more viewers and more opportunities for advertisers. As I said last quarter, our creator ecosystem and multiformat strategy will be key drivers of YouTube’s long-term growth. And to support this growth, we’re focused on, number one, Shorts; number two, engagement on CTV; number three, investing in our subscription offerings; and number four, a longer-term effort to make YouTube more shoppable.<\/p>

First, Shorts. We’re seeing strong watchtime growth. Monetization is also progressing nicely. People are engaging and converting on ads across Shorts at increasing rates. Number two, Connected TV. As Sundar said, we’re seeing momentum globally. Viewers love watching YouTube creators and their favorite content on the large screen. Advertisers are leaning in. <\/p>

Zooming out more broadly for a second: Across YouTube, we’re helping brands benefit from our expansive reach and drive the profitability they’re looking for. In one of our largest Marketing Mix Modeling studies to date, YouTube ROI is 40% higher than Linear TV and 34% higher than All Other Online Video, according to a custom analysis from January 2020 to March 2022 of Nielsen Compass ROI benchmarks across 16 countries and $19 billion of total media spend measured. This proves YouTube’s ability to drive effectiveness at scale.<\/p>

Next up, our subscription offerings. The goal is to be a one-stop shop for multiple types of video content across both ad-supported and premium services. Our launch of multiview on YouTube TV and our first-of-its-kind, a-la-carte access for NFL Sunday Ticket are two examples of how we’re investing here. Expect more updates over the coming quarters.<\/p>

Number four, shopping on YouTube. It’s still super early days. One highlight: Last year, we brought shopping to more creators and brands by partnering with commerce platforms like Shopify. Now more than 100,000 creators, artists and brands have connected their own stores to their YouTube channels to sell their products. We’re excited about the potential ahead.<\/p>

I’ll close with an awesome example of how we’re bringing the best across Google to our partners to accelerate innovation. <\/p>

Mercedes-Benz: In February, we announced a first-of-a-kind partnership to bring Google Maps Platform and YouTube into future Mercedes-Benz vehicles equipped with its next-gen MB.OS operating system. Beyond enabling the luxury automaker to design a customized navigation interface, we’ll also provide AI and data cloud capabilities to advance their autonomous driving efforts and create an enhanced customer experience.<\/p>

On that note, a big thank you. First, to our customers and partners for their trust and collaboration and, second, to our Googlers for all of their incredible work this quarter.<\/p>

Ruth, over to you.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Thank you, Philipp.<\/p>

Our financial results for the first quarter reflect continued healthy fundamental growth in Search and momentum in Cloud.<\/p>

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. <\/p>

I will conclude with our outlook.<\/p>

For the first quarter, our Consolidated Revenues were $69.8 billion, up 3%, or up 6% in constant currency. Search remained the largest contributor to revenue growth on a constant currency basis.<\/p>

In terms of expenses and profitability, year-on-year comparisons are impacted by three factors. <\/p>

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.<\/p>

Second, the adjustment we made to the estimated useful lives of servers and certain network equipment at the beginning of 2023. As you can see in our earnings release, the effect for the first quarter was a reduction in depreciation expense of $988 million.<\/p>

Third, the shift in timing of our annual employee Stock-Based Compensation awards from January to March delays the step-up in SBC from Q1 to Q2. This shift in timing does not affect the total amount of SBC over the full year 2023.<\/p>

Total Cost of Revenues was $30.6 billion, up 3%, driven by Other Cost of Revenues of $18.9 billion, which was up 7%, the biggest factor of which was compensation costs associated with data centers and other operations and followed by Content Acquisition Costs. <\/p>

Operating expenses were $21.8 billion, up 19%, with a significant impact from the charges related to workforce and office space reductions. Operating income was $17.4 billion, down 13%, and our operating margin was 25%. Net income was $15.1 billion.<\/p>

We delivered Free Cash Flow of $17.2 billion in the first quarter and $62 billion for the trailing 12 months. We ended the quarter with $115 billion in cash and marketable securities. <\/p>

Turning to our segment results, these were affected by two additional changes outlined in our 8-K filing.<\/p>

First, reflecting the increasing collaboration between DeepMind and Google Services, Google Cloud, and Other Bets, as of Q1, DeepMind is reported as part of Alphabet’s unallocated corporate costs.<\/p>

And second, beginning in the first quarter, we updated our cost allocation methodologies to provide our business leaders with increased transparency for decision-making. <\/p>

In our filing, we provided a recast of prior period results for the segments for these two changes. The highlights of the year-on-year performance of our segments that I will review reflect these recast results.<\/p>

Starting with Google Services, Revenues were $62 billion, up 1%. Google Search and Other advertising revenues of $40.4 billion in the quarter were up 2%. YouTube advertising revenues of $6.7 billion, were down 3%. Network advertising revenues of $7.5 billion, were down 8%.<\/p>

Other Revenues were $7.4 billion, up 9%, reflecting primarily ongoing significant subscriber growth in YouTube TV and YouTube Music Premium. <\/p>

TAC was $11.7 billion, down 2%, primarily reflecting a mix shift between Search and Network. <\/p>

Google Services Operating income was $21.7 billion, down 1%, and the operating margin was 35%.<\/p>

Turning to the Google Cloud segment, revenues were $7.5 billion for the quarter, up 28%. Growth in GCP remained strong across geographies, industries and products. Google Workspace’s strong results were driven by increases in both seats and average revenue per seat. Google Cloud had Operating Income of $191 million and the operating margin was 2.6%.<\/p>

As to our Other Bets, for the first quarter, revenues were $288 million and the operating loss was $1.2 billion.<\/p>

Turning to our outlook for the business, in terms of the operating environment, our results in the first quarter reflected ongoing headwinds due to a challenging economic environment, and the outlook remains uncertain.<\/p>

Foreign exchange headwinds have moderated and we expect less of a foreign exchange headwind in the second quarter based on current spot rates.<\/p>

With respect to Google Services, within Advertising, Q1 results reflect the resilience of Search with its unique ability to surface demand and deliver measurable ROI. Excluding the impact of foreign exchange, the revenue growth of Search was similar to last quarter.<\/p>

In YouTube, we saw signs of stabilization in ad spend on a sequential basis. We continue to prioritize growth in Shorts engagement, where we are encouraged by progress in monetization.<\/p>

As to Other Revenues, in YouTube subscriptions, we are pleased with the significant ongoing subscriber growth in both YouTube Music Premium and YouTube TV. In Play, revenues were down year-on-year primarily due to the continued impact of foreign exchange in APAC, although results have improved as we lapped the impact from our introduction of fee reductions last year.<\/p>

Turning to Google Cloud, our investments in product innovation, our Go-to-Market organization, and our partner ecosystem delivered strong results as customers across industries and geographies increasingly rely on Google Cloud to digitally transform their businesses. That being said, in Q1, we continued to see slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop, which remains uncertain. In terms of operating performance, we remain focused on driving long-term profitable growth in Cloud while continuing to invest given the substantial opportunity.<\/p>

Moving to Other Bets, in the first quarter, we similarly worked to refine strategies and prioritize efforts across the portfolio, including reductions to headcount.<\/p>

I will now walk you through an update on our efforts to re-engineer our cost base, slowing the pace of operating expense growth while creating capacity for key investment areas, particularly in support of AI across the company.<\/p>

First, as discussed on the fourth quarter call, we have efforts underway in three broad categories.<\/p>

Number one, using AI and automation to improve productivity across Alphabet for operational tasks as well as the efficiency of our technical infrastructure. Number two, managing our spend with suppliers and vendors more effectively. And number three, continuing to optimize how and where we work. As we’ve noted previously, all three workstreams are ramping up this year and we plan to build on these efforts in 2024 and in subsequent years.<\/p>

Second, with respect to headcount growth, the reported number of employees at the end of the first quarter includes almost all of the employees impacted by the workforce reduction we announced in January. We expect most of the impacted individuals will no longer be reflected in our headcount by the end of the second quarter.<\/p>

In terms of the outlook for headcount for the year, as we shared last quarter, we are meaningfully slowing the pace of hiring in 2023, while still investing in priority areas, particularly for top engineering and technical talent.<\/p>

In terms of our investments in AI, we are excited about the creation of Google DeepMind, combining the Brain Team from Google Research with DeepMind, with the goal to accelerate innovation and impact.<\/p>

Beginning in the second quarter of 2023, the costs associated with teams and activities transferred from Google Research will move from Google Services to Google DeepMind within Alphabet’s unallocated corporate costs.<\/p>

Finally, as it relates to capex, for 2023 we now expect total capex to be modestly higher than in 2022. As discussed last quarter, capex this year will include a meaningful increase in Technical Infrastructure versus a decline in office facilities. <\/p>

We expect the pace of investment in both data center construction and servers to step up in the second quarter and continue to increase throughout the year.<\/p>

Thank you. Sundar, Philipp and I will now take your questions.<\/p>

Operator:<\/strong> Thank you. As a reminder, to ask a question you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated. Your first question comes from Brian Nowak of Morgan Stanley. Please go ahead.<\/p>

Brian Nowak (Morgan Stanley)<\/strong>: Great. Thanks for taking my questions. I have two. First one for Sundar. Sundar, as you think over the course of the next 12 months and you have a lot of new AI tools to show us, what new behavior changes or capabilities are you most excited about for users, developers and advertisers as these tools come out?<\/p>

And then the second one for Ruth. Could you talk to us about how much of the AI tools have you incorporated internally to sort of drive more productivity out of your engineers, your sales force, your G&A? Or is that sort of something to come over the next couple years? Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google<\/strong>: Thanks, Brian. It is an exciting time. I do think we see an opportunity to, across the breadth of what we do at Google, to improve our experiences. Obviously in Search, we’ve been using AI for a while. It’s what has really helped lead Search and Search quality for the past few years, using LLMs. We now have a chance to more natively use LLMs, and I think -- I think the main way -- and by the way, as I said in my remarks, we are going to be deliberate. We’re going to -- our North Star is getting it right for users, so we’ll iterate and innovate as we have always done.<\/p>

The main area maybe I am excited by is we do know from experience that users come back to Search. They follow on. They’re engaging back on stuff they already did. And so for us, to use LLMs in a way we can serve those use cases better, I think it’s a real opportunity.<\/p>

Obviously, if it’s YouTube, the chance to really improve experiences for creators and consumers in terms of how the videos are viewed, et cetera. I think you can expect changes. <\/p>

Workspace, we already have changes rolling out, and it’s an area where I think we’ll see the biggest advances because I think productivity is a strong use case in which generative AI can help.<\/p>

And obviously on Cloud, this has been an important moment as pretty much every organization is thinking about how to use AI to drive transformation. And so across the board, from startups to large companies, they’re engaging with us. So I view it as a point of inflection there as well.<\/p>

Ruth?<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: 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.<\/p>

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. <\/p>

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.<\/p>

And Sundar just noted what we’re doing within Google Workspace. We obviously all live on Google Workspace. So that’s another example of how we benefit internally from the productivity from AI, but it’s also something that’s available for users and Enterprise customers more broadly.<\/p>

And then finally, one of the areas we’ve talked about is the opportunity with our compute capacity and all that we’ve done there and the infrastructure innovation; which, again, is helpful internally for what we do but on behalf of our customers.<\/p>

Brian Nowak (Morgan Stanley<\/strong>): Great. Thank you. Both.<\/p>

Operator<\/strong>: Thank you. The next question comes from Doug Anmuth of JPMorgan. Please go ahead.<\/p>

Doug Anmuth (JPMorgan)<\/strong>: Thanks for taking the questions. One for Sundar and then one for Ruth. <\/p>

Sundar, just as you think about integrating Bard into your Search products over time, can you just talk more about what percentage of Search queries you think would utilize Large Language Model-type responses? And how should we think about the costs of running Search on these models relative to today?<\/p>

And then, Ruth, I was just hoping you could follow up on your comment on capex, if you can help us understand the modest step-up in capex relative to three months ago. Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Doug. Obviously we have launched Bard as a complementary product to Search. We’ll be bringing LLM experiences more natively into Search as well.<\/p>

I do think, first of all, we’ll be rolling it out in an incremental way so that we can test, iterate and innovate. So I think we’ll approach it that way. <\/p>

I think overall, I think it can apply to a broad range of queries. So I think I’m excited that it can allow us to better help users in a category of queries maybe in which there was no right answer and they are more creative, et cetera. So I think those are opportunities.<\/p>

But even in our existing query categories, where we get a chance to do some heavy lifting for the users and use AI to better -- guide them, I think you will see us exploring in those directions as well. It’s early days, but I think there’s a lot of innovation to come.<\/p>

On the cost side, we’ve always -- cost of compute has always been a consideration for us and, if anything, I think it’s something we have developed extensive experience over many, many years. And so for us, it’s a nature of habit to constantly drive efficiencies in hardware, software and models across our fleet.<\/p>

And so this is not new. If anything, the sharper the technology curve is, we get excited by it, because I think we have built world-class capabilities. And taking that and then driving down costs sequentially and then deploying it at scale across the world.<\/p>

So I think we’ll take all that into account in terms of how we drive innovation here, but I’m comfortable with how we’ll approach it.<\/p>

Ruth Porat, CFO Alphabet and Google: <\/strong>And in terms of capex, we do now expect that total capex for the year for 2023 will be modestly higher than in 2022. I tried to point out that we are expecting a step-up in the second quarter, and that will continue to increase throughout the year.<\/p>

And as we discussed last quarter, AI is a key component. It underlies everything that we do, and we’re continuing to invest in support of AI, support of our users, advertisers and our Cloud customers. So that’s what we’re commenting on here.<\/p>

And then as we talked about last quarter, the increase in capex for the full year 2023 reflects the sizable increase in Technical Infrastructure investment, and, on the flip side, a decline in office facilities relative to last year.<\/p>

Doug Anmuth (JPMorgan)<\/strong>: Thank you both.<\/p>

Operator<\/strong>: Thank you. The next question comes from Eric Sheridan from Goldman Sachs.<\/p>

Please go ahead.<\/p>

Eric Sheridan (Goldman Sachs<\/strong>): Thank you so much for taking the questions and hope everyone on the team is well. Maybe two if I could. First on Cloud. Obviously one of the dominant themes -- and you touched upon it -- is this client optimization theme that’s going on broadly in Cloud computing. Can you give us a little bit more of your perspective on where we are in terms of the optimization theme broadly in Cloud computing as a headwind to either revenue growth or backlog growth, compared to the tailwinds of broader long-term consumption growth and possibly the contribution of AI initiatives to cloud computing growth?<\/p>

And then second, on YouTube, obviously you have seen a lot of success with respect to engagement and consumption on Shorts. Can you give us an update on where we are on monetization trends in Shorts compared to the consumption you have already seen in usage shifts? Thank you so much.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> So in terms of the Cloud question, the point we’re trying to underscore is there’s uncertainty in the economic environment. And so we saw some headwind from slower growth of consumption with customers really looking to optimize their costs given that macroclimate. We’ll leave the forecasting to you on that, but as both Sundar and I commented on, really pleased with the momentum that the team has been delivering and the breadth of what they have been working on.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> I do think – I would add that we are leaning into optimization. I mean, this is an important moment to help our customers and we take a long-term view. So it’s definitely an area we are leaning in and trying to help customers make progress in their efficiencies where we can.<\/p>

Philipp?<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>Yes. On the Shorts side. Look, Shorts viewership is growing rapidly. We announced 50 billion plus daily views on the Q4 earnings call up from 30 billion last spring.<\/p>

We’re pleased with our continuing progress in monetization; as I said earlier, that people are engaging and converting on ads across Shorts at increasing rates. Closing the gap between Shorts and long form is a top priority for us, as is continuing to build a greater creator and user experience.<\/p>

Ads on Shorts are now available via Video Action, App, Discovery and Performance Max campaigns and via product feeds. Shorts are also shoppable. Again, we’re the only destination where creators can produce all forms of content across multiple formats and screens with multiple ways to make a living.<\/p>

And as Sundar said, last year the number of channels that uploaded to Shorts daily grew over 80%. And then in February we brought revenue sharing to Shorts via our YouTube Partner Program. Our sustainable revenue sharing model at scale remains pretty unique in the industry, and we continue to see strong creator adoption.<\/p>

So ultimately, our goal is to make YouTube the best place for Shorts viewers and creators, and that’s really what we’re focused on right now.<\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thank you.<\/p>

Operator<\/strong>: Thank you. The next question comes from Ross Sandler of Barclays. Please go ahead.<\/p>

Ross Sandler (Barclays)<\/strong>: Hey, guys. I will just ask a tough question.<\/p>

Sundar, you came up in the 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?<\/p>

And, Ruth, does this have any impact on your outlook for profitability of overall Alphabet over the long term? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Look, I think these dynamics have always been around. It’s important to remember -- as far as I can remember, we have always been in a competitive environment for these deals. And while I can’t comment on the specifics of any of our partnership agreements, what has served us well is always, first of all, building the best product possible, focused on giving value to users. And when we work with our partners, we work hard to create a win-win experience, and ultimately partners end up choosing us because that’s what their users want. And that’s always been what’s helped Search be widely distributed.<\/p>

So I think it all starts with continuing to innovate and improve Search and making sure we are leading there. So I think we have always approached it very robustly over – the – many, many years, and I’m comfortable that we’ll continue to be able to do so.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> And then in terms of just longer-term profitability, I think I’ll broaden out your question somewhat because the way we’re looking at it is we continue to be committed to investing for growth and we want to ensure that we have overall capacity for growth. And so we have a number of workstreams underway to – as we keep describing it – durably reengineer our cost base.<\/p>

In particular what we’re excited about are long-term opportunities with AI, and we want to make sure we have the capacity to continue to invest there and the other areas where we see long-term growth in Search and Ads, Cloud, YouTube, Hardware. So that underscores our efforts to build in additional flexibility. And as we have said repeatedly, we want to ensure that expense growth is not growing ahead of revenue growth, and that means driving revenue growth and really being as disciplined as we can on these various workstreams that we’ve discussed – earlier in this call, and last quarter as well, to improve our expense growth trajectory.<\/p>

Operator: <\/strong>Thank you. The next question will come from Justin Post of BAML. Please go ahead.<\/p>

Justin Post (BoA-Merrill Lynch)<\/strong>: Great. Thanks. Maybe one for Sundar, one for Ruth. <\/p>

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.<\/p>

Are you optimistic on that transition? And maybe give us your thoughts there. <\/p>

And then, Ruth, backing out the one-time charges, it looks like opex growth is now 8%, so real progress there. Could you give us a flavor of where you are, you think, in your optimization cycle? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> So, first of all, throughout the years, as we have gone through many, many shifts in Search and as we have 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.<\/p>

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.<\/p>

And I don’t think -- the underpinnings are the fact that users want relevant commercial information. They want choice in what they look at. Even in areas where we are summarizing and answering, et cetera, users want choice. We care about sending traffic. Advertisers want to reach users. And so all those dynamics, I think, which have long served us well, remain. And, as I said, we’ll be iterating and testing as we go. And I feel comfortable we’ll be able to drive innovation here like we’ve always done.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> And in terms of our opex trajectory, yes, there was the elevated expense in 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.<\/p>

So a little bit of complexity there. But at the core of your question, we remain extremely focused on these various workstreams that we’ve talked about. It starts with the pace of hiring. It goes to the various workstreams that both Sundar and I referenced around using AI and automation to improve productivity, all that we’re doing with suppliers and vendors to be as efficient as possible, all that we’re doing around optimizing how and where we work. You have seen some of those announcements this quarter, beyond the workforce reduction, things that we’re doing in, for example, office services. And we’re executing against each of these various workstreams. So our view is that there’s more to do. And as we tried to be clear, we’re in execution mode. You’ll see some of the benefit in ’23. You’ll see more of it in ’24. And we’re going to continue building against it beyond.<\/p>

Justin Post (BoA-Merrill Lynch):<\/strong> Great. Thank you.<\/p>

Operator: <\/strong>Thank you. The next question comes from Michael Nathanson of MoffettNathanson. Please go ahead.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> One for Philipp. One for Ruth. <\/p>

Philipp, we are trying to get under the hood on Search advertising and trying to understand changes in demand between sellers of goods and sellers of services. Can you give us any help looking at the service side? Has demand returned back to pre-pandemic levels?<\/p>

And then in terms of goods and eCommerce, have you seen a slowing of demand? Anything that can help us kind of level-set it back to maybe pre-pandemic levels to understand services versus goods demand?<\/p>

And for Ruth, on the terms of efficiency and being resilient, how does the specifically higher cost of capital impact the way you are managing, evaluating the Other Bets assets? Anything there on maybe rethinking some of the Other Bets and what you are doing in changing some of the structures of the Other Bets assets? Thanks.<\/p>

Ruth Porat, CFO Alphabet and Google<\/strong>: It was a bit hard to hear you. You were breaking up, so I think I’m going to go ahead and start and address what I heard as the second question as we’re looking at higher cost of capital in this environment, how does that affect the way we’re looking at Other Bets. Hopefully we heard you correctly. It was crackling.<\/p>

Look, I think as we’ve talked about repeatedly, as it relates to Other Bets, our focus is to use deep technology to drive innovation, and we’re very focused on the pace of investment and financial returns.<\/p>

That has been a consistent focus, to generate attractive returns. And I think the core operating models and the long-term operating models are going to be the most relevant as we’re looking at the returns we can generate.<\/p>

Yes, absolutely, mindful of a higher cost of capital. But I think at its core, we’re looking at what’s the value creation and the return on those.<\/p>

And as we indicated, when we went through the reduction in force, we similarly worked across the Other Bets and some of them as they’re on a path to ongoing growth, we were moderating what is the expense trajectory there as we’re looking at what’s the overall return on invested capital. And we’re continuing to work on these to make sure that we’re delivering value.<\/p>

Your point is an important one that’s part of a broader question about the underlying operating assumptions.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Philipp on the first one?<\/p>

Philipp Schindler, SVP and CBO, Google<\/strong>: On the first part, again, it didn’t come across quite clearly, but I hope I understood correctly.<\/p>

In Search, revenues grew modestly year-over-year, again, reflecting an increase in the retail and travel verticals, offset partially by decline in finance and media and entertainment. So excluding the impact of FX, performance was actually similar to last quarter. <\/p>

The ongoing performance of Search, notwithstanding the headwinds, reflects really Search resilience with the, I would say, ability of Search to surface demand and deliver a measurable ROI in an uncertain environment.<\/p>

I called out the key verticals in the quarter. There’s really no additional color on other verticals. I would say maybe more broadly what we saw reflects what’s being reported elsewhere. And across the headlines, many companies are very focused on shorter-term profitability amidst this uncertainty, and some pulled back ads budgets as well.<\/p>

Michael Nathanson (MoffettNathanson)<\/strong>: Thanks. That’s clear.<\/p>

Operator:<\/strong> Thank you. The next question comes from Mark Mahaney of Evercore. Please go ahead.<\/p>

Mark Mahaney (Evercore ISI)<\/strong>: Can I try two questions, please? I think, Philipp, you talked about kind of more of a pullback in Network Ad revenue versus Search and YouTube. Do you have any thoughts on why that was the case?<\/p>

And then, Ruth, the Cloud business, even with the accounting changes, some of this very steady march towards profitability, you turned a corner now. You talked about growing the business for long-term profitability.<\/p>

But are there any reasons why it shouldn’t be sustainably profitable kind of starting from here as the business continues to scale? Or could it be that that profitability could be wobbly for a while, before it’s sustainably profitable -- of that segment, Cloud? Thank you.<\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> I’ll take both of those.<\/p>

So in Network, really it’s a continuation of what we talked about last quarter. We saw the ongoing pullback in advertiser spend. I would contrast that – last quarter, we talked about both pullback in YouTube and Network. And we were pleased that we saw the stabilization in ads spend on a sequential basis in YouTube. We still saw ongoing pullback in Network, which tends to be a mix of businesses, as you know well.<\/p>

And then in terms of Cloud, I tried to make that clear in opening comments as well. I think it’s a really important question. We are very pleased with the Q1 results. And as both Sundar and I noted, we’re intensely focused on all elements of the cost base and the long-term path to attractive profitability.<\/p>

At the same time, I think at the core of your question, what we were trying to convey is – we will continue to invest to support long-term growth, in particular given the opportunities we see delivering AI capabilities to our customers.<\/p>

So as I’ve said in the past, you shouldn’t extrapolate from quarter to quarter. But we are very pleased to be at this level and are continuing to focus on profitability and long-term value creation here.<\/p>

Mark Mahaney (Evercore ISI)<\/strong>: Okay. Thank you, Ruth.<\/p>

Operator: <\/strong>Thank you. And our last question will come from Colin Sebastian from Baird. Please go ahead.<\/p>

Colin Sebastian (Baird):<\/strong> Great. Thank you. Two from me as well.<\/p>

For 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?<\/p>

And then, Philipp, regarding your comments on Retail, specifically on Shopping and Payments, how should we think about that evolving across the platform this year? Maybe similarly, what are some milestones we should look out for on that front? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google<\/strong>: Thanks. I’m quite excited by bringing two 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. <\/p>

And so both getting access to pooled 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 -- the core product is obviously building more capable models safely and responsibly and doing it -- taking into account all of the capabilities our customers need, both on the consumer side and the Cloud side and being able to iterate and getting that virtuous cycle going.<\/p>

So you already have seen us put out PaLM APIs, and we are incorporating PaLM across our products. But we will continue that progress, and we’ll keep you posted as we do.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>So retail is an important vertical and driver for us. And I called out the year-over-year increase in Retail in Search and Other. <\/p>

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, offline, both. We’re helping them drive their business goals, meet customers wherever they choose to shop.<\/p>

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.<\/p>

I have talked at length on prior calls about omnichannel. Our local and omnichannel solutions are helping bridge the gap here between online and offline by using AI to reach nearby shoppers, promote local inventory, fulfillment options, optimize in-store visits and sales, for example.<\/p>

And then to help really retain loyal customers and acquiring new ones, we have YouTube, app deep linking, and new customer acquisition goals in PMax are helping here. Making checkouts easy with tools like virtual cards on Chrome is obviously important. So those are just some of the key points.<\/p>

Overall, we are giving retailers really the best, I hope, AI-powered tools and solutions to maximize reach and ROI, and really create a seamless experience, including, where possible, on the payments side for their customers. And this will continue to be our focus here.<\/p>

Colin Sebastian (Baird):<\/strong> Thank you.<\/p>

Operator: <\/strong>Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Jim Friedland for any further remarks.<\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thanks everyone for joining us today. We look forward to speaking with you again on our second quarter 2023 call.<\/p>

Thank you and have a good evening.<\/p>

Operator:<\/strong> Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.<\/p>

_____________________________
1 <\/sup>Based on 2022 Forbes Global 2000 list<\/p>

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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.
<\/strong><\/p>

July 25, 2023<\/strong><\/p>

Operator:<\/strong> Welcome, everyone. Thank you for standing by for the Alphabet second quarter 2023 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. To ask a question during the session, you will need to press *1 on your telephone. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

 <\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thank you. Good afternoon, everyone, and welcome to Alphabet’s second quarter 2023 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat. Now I’ll quickly cover the Safe Harbor.<\/p>

 <\/p>

Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially.<\/p>

 <\/p>

For more information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC.<\/p>

 <\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>

 <\/p>

Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>

 <\/p>

And now I’ll turn the call over to Sundar.<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thank you, Jim. And hello, everyone.<\/p>

 <\/p>

We’re holding our call from London today. It’s an important hub for us, and I’m excited to spend time with our local teams, including Google DeepMind, as well as leaders and partners from across the region.<\/p>

 <\/p>

This quarter we shared great progress at I\/O, Brandcast and Google Marketing Live, and we’re looking forward to Cloud Next in August. The momentum across the company drove our results this quarter.<\/p>

 <\/p>

We delivered solid performance in Search and YouTube, and ongoing strong growth in Cloud, where we remain focused on long-term value creation.<\/p>

 <\/p>

And we continue our important work to operate more efficiently, creating durable savings to fund investments in our biggest priorities.<\/p>

 <\/p>

Today I’ll talk about this momentum, including our continued leadership in AI and our excitement about the evolution of Search.<\/p>

 <\/p>

At I\/O, we shared how we are making AI helpful for everyone in four important ways. First, improving knowledge and learning. This is our seventh year as an AI-first company, and we intuitively know how to incorporate AI into our products. Large language models make them even more helpful -- models like PaLM 2, and soon, Gemini, which we’re building to be multimodal.<\/p>

 <\/p>

These advances provide an opportunity to reimagine many of our products, including our most important product, Search. We’re in a period of incredible innovation for Search, which has continuously evolved over the years.<\/p>

 <\/p>

This quarter saw our next major evolution with the launch of the Search Generative Experience, or SGE, which uses the power of generative AI to make Search even more natural and intuitive. User feedback has been very positive so far.<\/p>

 <\/p>

It can better answer the queries people come to us with today, while also unlocking entirely new types of questions that Search can answer.<\/p>

 <\/p>

For example, we found that generative AI can connect the dots for people as they explore a topic or project, helping them weigh multiple factors and personal preferences before making a purchase or booking a trip.<\/p>

 <\/p>

We see this new experience as another jumping-off point for exploring the web, enabling users to go deeper to learn about a topic. I’m proud of the engineering excellence underlying our progress.<\/p>

 <\/p>

Since the May launch, we’ve boosted serving efficiency, reducing the time it takes to generate AI snapshots by half. We’ll deliver even faster responses over time.<\/p>

 <\/p>

We’re engaging with the broader ecosystem and will continue to prioritize approaches that send valuable traffic and support a healthy, open web.<\/p>

 <\/p>

Ads will continue to play an important role in this new Search experience. Many of these new queries are inherently commercial in nature. We have more than 20 years of experience serving ads relevant to users’ commercial queries and SGE enhances our ability to do this even better.<\/p>

 <\/p>

We are testing and evolving placements and formats and giving advertisers tools to take advantage of generative AI.<\/p>

 <\/p>

Philipp will talk more about how we’re using generative AI in our ads products to better serve both advertisers and users.<\/p>

 <\/p>

Second, we’re helping people use AI to boost their creativity and productivity. One example is Bard, our experiment in conversational AI. Since launching in March, it continues to get better.<\/p>

 <\/p>

We rolled out a number of exciting features and capabilities earlier this month. Bard is now available in most of the world and over 40 of the most widely spoken languages.<\/p>

 <\/p>

We also added Google Lens capabilities, so you can take an image and ask all kinds of questions, turn it into code, and more. This new feature has been really popular, and it’s been great to see people sharing their experiences.<\/p>

 <\/p>

Bard can now read its responses aloud, and you can adjust them for tone and style. We continue to see great interest in using Bard for coding tasks.<\/p>

 <\/p>

On productivity, earlier this year, we introduced Duet AI in both Google Cloud and Workspace. It helps people collaborate with AI to code, write, and get better insights from data and more. Today, more than 750,000 Workspace users have access to the new features in preview.<\/p>

 <\/p>

Third, we’re making it easier for others to innovate using AI. One way is by providing Google Cloud’s high-performance infrastructure, optimized for a range of generative AI models. It’s being used by thousands of customers and partners to transform their businesses. I’ll give an update on the Cloud business in just a moment.<\/p>

 <\/p>

Finally, we’re making sure we develop and deploy AI technology responsibly, so that everyone can benefit. Last week we signed on to joint commitments with other leading AI companies at the White House, building on the principles that have guided our work for many years.<\/p>

 <\/p>

To take advantage of the AI opportunities ahead, we’ve been sharpening our focus as a company: investing responsibly with great discipline, and finding areas where we can operate more cost effectively. We’ve made good progress in data center machine efficiency which will pay dividends as we continue to invest in AI.<\/p>

 <\/p>

We continue to slow our expense growth and pace of hiring and ensure our teams are aligned to our highest priorities. This quarter we reallocated a number of teams, including aligning Waze’s ad sales with our existing business organization. We are combining various engineering efforts across core infrastructure and Cloud. Products like Bard and SGE are being built by small, fast-moving teams that have been re-allocated to these high-priority efforts.<\/p>

 <\/p>

Overall, we’re actively moving people to higher-priority activities within the company. And we continue to optimize our real estate footprint for current and future needs.<\/p>

 <\/p>

Next, Google Cloud. We see continued growth, with Q2 revenue of $8 billion, up 28%, and operating profit of $395 million.<\/p>

 <\/p>

Our AI-optimized infrastructure is a leading platform for training and serving generative AI models. More than 70% of Gen AI unicorns are Google Cloud customers, including Cohere, Jasper, Typeface, and many more.<\/p>

 <\/p>

We provide the widest choice of AI supercomputer options with Google TPUs and advanced Nvidia GPUs, and recently launched new A3 AI supercomputers powered by Nvidia’s H100. This enables customers like AppLovin to achieve nearly two times better price performance than industry alternatives.<\/p>

 <\/p>

Our new generative AI offerings are expanding our total addressable market and winning new customers. We are seeing strong demand for the more than 80 models - including third party and popular open source - in our Vertex, Search, and Conversational AI platforms, with the number of customers growing more than 15X from April to June. Among them, Priceline is improving trip planning capabilities; Carrefour is creating full marketing campaigns in a matter of minutes; and Capgemini is building hundreds of use cases to streamline time-consuming business processes.<\/p>

 <\/p>

Our new Anti-Money Laundering AI helps banks like HSBC identify financial crime risk, and our new AI-powered Target and Lead Identification Suite is being applied at Cerevel to help enable drug discovery.<\/p>

 <\/p>

Our generative AI capabilities also give us an opportunity to win new customers and upsell into our installed base of 9 million paying Google Workspace customers. I mentioned Duet AI earlier; Instacart is using it to improve customer service workflows, and companies like Extend are scaling sales outreach and optimizing customer service. Customers confidently choose Workspace because of the safety and security we provide their distributed workforces.<\/p>

 <\/p>

Our AI capabilities are helping us differentiate core products, like cybersecurity. We have integrated AI throughout our portfolio, winning organizations like Pfizer, who are using Google Cloud to transform their security operations. Chronicle Security Operations Suite, with Mandiant fully integrated, is helping customers stay protected at every stage of the security lifecycle. In the first half of 2023, we saw a 35% increase in incident response engagements compared to the same period last year.<\/p>

 <\/p>

Finally, our AI capabilities are also expanding our partner ecosystem, with hundreds of ISVs and SaaS providers such as Box, Salesforce, and Snorkel, and the world’s largest consulting firms, like Accenture and Deloitte. They’ve collectively committed to train more than 150,000 people on Google Cloud generative AI.<\/p>

 <\/p>

Turning next to YouTube. Earlier this year, we shared that revenues across YouTube products were nearly $40 billion for the 12 months ending in March.<\/p>

 <\/p>

I’m really pleased with how YouTube is growing audiences and driving increased engagement. YouTube Shorts are now watched by over 2 billion logged-in users every month, up from 1.5 billion just one year ago.<\/p>

 <\/p>

The Living Room remained our fastest growing screen in 2022 in terms of watchtime. We’re reaching more than 150 million people on Connected TV screens in the U.S., and seeing growth and momentum internationally.<\/p>

 <\/p>

And on subscriptions, there’s good growth. Late last year, we announced over 80 million YouTube Music and Premium subscribers.<\/p>

 <\/p>

Signups for NFL Sunday Ticket kicked off in April, and we look forward to hosting our first football season on YouTube this fall.<\/p>

 <\/p>

Finally, Hardware and Android. Pixel continues to have strong sales momentum. We introduced new Pixel devices at I\/O, including Pixel Fold, Pixel Tablet and Pixel 7a, and we’ve had a great response.<\/p>

 <\/p>

Android 14, our latest OS, will incorporate our advances in generative AI to personalize Android phones. The Pixel and Android teams are working together to advance the latest devices. The Pixel Fold is a great example with its many hardware and software innovations.<\/p>

 <\/p>

Before I close, you may have seen that we just announced some exciting news that Ruth is taking on the important new role of President and Chief Investment Officer. As our longest-serving CFO, she has helped guide the company through an amazing period of growth, a global pandemic and the ongoing economic uncertainty that has followed.<\/p>

 <\/p>

I’m excited to continue to work with Ruth, who will lead our 2024 planning and remain as CFO while we do a full search for a successor. So it’s business as usual now and no change in approach for the future. I look forward to seeing the impact Ruth will have in her new role driving our investments, engaging with our stakeholders and creating opportunities for people and communities everywhere.<\/p>

 <\/p>

To close, I’m energized by the pace of innovation and the momentum across the company. With 15 products that each serve a half a billion people, and six that serve over 2 billion each, we have so many opportunities to deliver on our mission.<\/p>

 <\/p>

Thank you to our employees around the world for their great work this quarter.<\/p>

 <\/p>

Over to you, Philipp.<\/p>

 <\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar. And hello, everyone. Happy to be here with you all today.<\/p>

 <\/p>

Let’s jump right into our performance for the quarter. Google Services revenues of $66 billion were up 5% year-on-year.<\/p>

 <\/p>

In Google Advertising, Search & Other revenues grew 5% year-on-year, led by solid growth in the Retail vertical. In YouTube Ads, revenues were up 4% year-on-year, driven by growth in brand, followed by direct response, reflecting further stabilization in advertiser spend. In Network, revenues declined 5% year-on-year.<\/p>

 <\/p>

Google Other revenues were up 24% year-on-year, led by strong growth in YouTube subscriptions revenues.<\/p>

 <\/p>

Let’s now take a few minutes to cover our three key priority areas: Google AI, Retail and YouTube, which I’ve laid out in prior quarters as clear opportunities for long-term advertising growth. I’ll then turn it over to Ruth for more details on our financial performance.<\/p>

 <\/p>

Q2 was a big quarter for Google AI and our Ads products. I\/O, GML, and Brandcast were a testament to our deep commitment to building cutting-edge tools and solutions that help businesses navigate complexity in real-time and deliver the results they need, all while improving the experience for users. Sundar covered some of these innovations; I’ll share more. It’s worth reiterating that while generative AI is now supercharging new and existing Ads products with tons of potential ahead, AI has been at the core of our Ads business for years. In fact, today, nearly 80% of advertisers already use at least one AI-powered Search Ads product.<\/p>

 <\/p>

Our approach to AI in ads remains grounded in understanding what drives real value for businesses right now and what’s most helpful for users.<\/p>

 <\/p>

Advertisers tell us they’re looking for more assistive experience to get set up with us faster. So at GML, we launched a new conversational experience in Google Ads, powered by a LLM tuned specifically from ads data to make campaign construction easier than ever.<\/p>

 <\/p>

Advertisers also tell us they want help creating high-quality ads that work in an instant, so we’re rolling out a revamped asset creation flow in Performance Max that helps customers adapt and scale their most successful creative concepts in a few clicks.<\/p>

 <\/p>

And there’s even more with PMax. We launched new asset insights and new search term insights that improve campaign performance understanding and new customer lifecycle goals that let advertisers optimize for new and existing customers while maximizing sales.<\/p>

 <\/p>

We’ve long said it’s all about reaching the right customer with the right creative at the right time, so later this year, Automatically Created Assets, which are already generating headlines and descriptions for Search ads, will start using generative AI to create assets that are even more relevant to customers’ queries.<\/p>

 <\/p>

Broad Match also got updates. AI-based keyword prioritization ensures the right keyword, bid, budget, creative and landing page is chosen when there are multiple overlapping keywords eligible.<\/p>

 <\/p>

Then to make it easier for advertisers to optimize visual storytelling and drive consideration in the mid-funnel, we’re launching two new AI-powered ad solutions -- Demand Gen and Video View Campaigns -- and both will include Shorts inventory.<\/p>

 <\/p>

Sundar talked earlier about SGE and our early experiments with new ad formats. We’re in active conversations with advertisers, publishers and partners to get their input on how to make these solutions work best for them and are excited to test and evolve this experience as we learn more.<\/p>

 <\/p>

Let’s pivot to Retail, where we had a good quarter. Profitability remains a top theme for retailers, so solutions like PMax that drive bottom-line value continue to do well. We also continued to see success in helping businesses unlock efficient growth and deliver on their omnichannel goals.<\/p>

 <\/p>

Take Ace Hardware, who tapped into AI-powered Search and omnibidding to capture increased seasonal demand leading up to Memorial Day. This drove increases across online sales, store visits and in-store sales, resulting in 87% year-over-year growth in omni revenue from Google Ads, and led to one of the largest revenue weeks ever for Ace store owners.<\/p>

 <\/p>

Q2 also brought innovation on the consumer and merchant front. We rolled out a new gen AI-powered virtual try-on tool that brings the fitting room experience online. Shoppers can try on women’s tops across a wide array of models from brands like Anthropologie, Everlane, H&M and Loft.<\/p>

 <\/p>

Rich, visual, engaging content is a win-win for both consumers and merchants. In fact, product offers with more than one image see a 76% average increase in impressions and a 32% increase in clicks. Our new Product Studio uses gen AI to help retailers create tailored, eye-catching imagery for free, and we’re working towards optimizing for performance. We think this will be a game-changer, especially for SMBs who can now create high-quality images to use both across Google and their own sites without spending a lot of time or money.<\/p>

 <\/p>

As we continue to make Google a valuable place for merchants to grow their businesses and connect with users, Merchant Center Next is another win. We’ve seen 2X growth in the number of businesses using Merchant Center in the past two years, and we’re now simplifying it by automating inventory management and giving a consolidated view of performance insights. Better tools means better growth for merchants and better experiences for users.<\/p>

 <\/p>

Moving to YouTube. I’ve said it before, I’ll say it again: YouTube starts with our creators, and it’s their success and our multiformat strategy that will drive YouTube’s long-term growth. In prior quarters, I’ve laid out how we think about this: enabling our creators to make a living on our platform, with more formats and awesome tools, leads to more content, which leads to quality consumption of video content -- another big focus of the team -- and this leads to better opportunities for monetization and for advertisers to support this incredible ecosystem.<\/p>

 <\/p>

As we think about growth, we’re focused on Shorts, Connected TV and our Subscription Offerings, all of which grew nicely this quarter. Let me double-click into Shorts and CTV.<\/p>

 <\/p>

First, Shorts. Momentum remains strong. Watchtime and monetization are moving in the right direction. Last year we introduced ads on Shorts to help drive performance in direct response campaigns via Video Action, Performance Max and App Campaigns. As of Q2, brand advertisers can start testing Shorts ads in awareness campaigns. It’s still early days, but we’re excited by the results.<\/p>

 <\/p>

Laneige, Amorepacific’s number one premium skincare brand, was an early adopter. It leaned into Video Reach campaigns and new creative over a 10-day test to drive a 21% increase in unique users reached from Shorts and In-feed, all at a more efficient CPM.<\/p>

 <\/p>

Second, Connected TV. Substantial engagement by viewers and ROI for advertisers is driving monetization of the Living Room. We’re very pleased with the growth we’ve seen and how we’re delivering the reach, results and relevance that businesses are looking for, at scale.<\/p>

 <\/p>

At Brandcast, we announced two new ad offerings for streaming. First, 30-second unskippable ads are coming to YouTube Select, which is landing 70%+ of impressions on the TV screen. 30-second ads are a TV industry staple, and now YouTube is bringing our advanced audience capabilities and unparalleled reach to the format.<\/p>

 <\/p>

We’re also exploring new Pause experiences so brands can drive awareness or action when you hit pause.<\/p>

 <\/p>

Looking at YouTube holistically, according to our measurement partners -- Nielsen, TransUnion, and Ipsos MMA -- YouTube delivers higher ROI than TV and other online video on average.<\/p>

 <\/p>

Take the Hershey Company. As part of a multiyear partnership to optimize its YouTube strategy, Hershey’s brands have been tapping into CTV, efficient AI-powered formats and made-for-platform creative, leading to YouTube becoming its number one ROI-driving media partner, producing a 65%+ increase in ROI from 2018-2023.<\/p>

 <\/p>

One last highlight that bridges the power of YouTube with our continued efforts to bring the best across Google to our partners. With Warner Bros. Discovery, we expanded our multiyear relationship across our entire Android ecosystem, including partnering on the launch of Max, a deepened, mutually-beneficial relationship on Google TV and plans to work together on new surfaces. YouTube’s expanded deal for Max, inclusive of a Max\/NFL Sunday Ticket bundle on YouTube TV, also underscores our joint commitment to bring the highest quality content and experiences to our customers.<\/p>

 <\/p>

I’ll close by echoing Sundar, with a huge thank you to Googlers everywhere for their incredible passion and hard work, and to our customers and partners for their continued collaboration and trust.<\/p>

 <\/p>

Ruth, over to you.<\/p>

 <\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Thank you, Philipp.<\/p>

 <\/p>

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.<\/p>

 <\/p>

So turning to the results. We’re very pleased with our financial results for the second quarter, which reflect an acceleration of growth in Search and momentum in Cloud.<\/p>

 <\/p>

My comments will be on year-over-year comparisons for the second quarter, unless I state otherwise.<\/p>

 <\/p>

I will start with results at the Alphabet level, followed by segment results, and conclude with our outlook.<\/p>

 <\/p>

For the second quarter, our Consolidated Revenues were $74.6 billion, up 7%, or up 9% in constant currency. Search remained the largest contributor to revenue growth.<\/p>

 <\/p>

Total Cost of Revenues was $31.9 billion, up 6%, driven by Other Cost of Revenues of $19.4 billion, which was up 8%.<\/p>

 <\/p>

Growth here was driven by Content Acquisition Costs, primarily for YouTube subscription offerings, followed by Hardware costs associated with Pixel family launches in the second quarter.<\/p>

 <\/p>

As noted in our earnings release, the overall increase in data center and other operations costs was partially offset by a reduction in depreciation expense due to the change in estimated useful lives we discussed last quarter.<\/p>

 <\/p>

Operating expenses were $20.9 billion, up 4%. Operating income was $21.8 billion, up 12%, and our operating margin was 29%. I will cover our expense and margin performance in our outlook.<\/p>

 <\/p>

Other Income & Expense was $65 million. Net income was $18.4 billion.<\/p>

 <\/p>

We delivered Free Cash Flow of $21.8 billion in the second quarter and $71 billion for the trailing 12 months, reflecting improved operating performance, as well as the deferral of certain tax payments to the fourth quarter of 2023 as noted in our earnings release. We ended the quarter with $118 billion in cash and marketable securities.<\/p>

 <\/p>

Turning to our segment results, prior period results have been recast for two changes that we made as of the first quarter.<\/p>

 <\/p>

First, DeepMind is now reported as part of Alphabet’s unallocated corporate costs. Second, we updated our cost allocation methodologies. In the second quarter, we then combined the Brain team from Google Research with DeepMind to form Google DeepMind. Costs associated with the Brain team, which were previously included in Google Services, are now reported as part of Alphabet’s unallocated corporate costs. We have not recast prior period results to reflect this additional change.<\/p>

 <\/p>

Within Google Services, revenues were $66.3 billion, up 5%.<\/p>

 <\/p>

Google Search and Other advertising revenues of $42.6 billion in the quarter were up 5%, led by growth in retail.<\/p>

 <\/p>

YouTube advertising revenues of $7.7 billion, were up 4% driven by brand advertising, followed by direct response, reflecting further stabilization in spending by advertisers.<\/p>

 <\/p>

Network advertising revenues of $7.9 billion were down 5%.<\/p>

 <\/p>

Other Revenues were $8.1 billion, up 24%, reflecting growth in YouTube non-advertising revenues, primarily from subscription growth in YouTube Music Premium and YouTube TV; followed by growth in Hardware revenues, primarily driven by the launch of the Pixel 7a in the second quarter.<\/p>

 <\/p>

Finally, Play returned to positive growth in the second quarter.<\/p>

 <\/p>

TAC was $12.5 billion, up 3%.<\/p>

 <\/p>

Google Services operating income was $23.5 billion, up 8%, and the operating margin was 35%.<\/p>

 <\/p>

Turning to the Google Cloud segment, revenues were $8.0 billion for the quarter, up 28%.<\/p>

 <\/p>

GCP revenue growth remained strong across geographies, industries and products. That being said, we saw a continued moderation in the rate of consumption growth as consumers [sic: customers] optimized their spend.<\/p>

 <\/p>

Google Workspace strong revenue growth was driven by increases in both seats and average revenue per seat.<\/p>

 <\/p>

Google Cloud had Operating Income of $395 million and the operating margin was 5%.<\/p>

 <\/p>

As to our Other Bets, for the second quarter, revenues were $285 million and the operating loss was $813 million. The decrease in operating loss was primarily driven by a reduction in valuation-based compensation liabilities related to certain Other Bets.<\/p>

 <\/p>

Turning to our outlook for the business, with respect to Google Services, first, within Advertising, we were pleased with the acceleration of Search advertising revenue growth in the second quarter. Our continued ability to generate sustained growth reflects our unparalleled engineering innovation that creates extraordinary experiences for users and capabilities for advertisers and delivered with the deep expertise of our Go-to-Market team.<\/p>

 <\/p>

And in YouTube, we saw ongoing signs of stabilization in advertiser spending. We are prioritizing product focus on increasing quality consumption of video content with both Shorts and in the Living Room, which is translating into improved monetization.<\/p>

 <\/p>

Second, within Other Revenues, in our YouTube subscription products, the sustained strong growth in revenues reflects significant subscriber growth. You may have seen that last week we increased subscription prices for YouTube Music and Premium which underscores the value of the products.<\/p>

 <\/p>

Strong year-on-year growth in Hardware revenues was due in large part to a timing change, given the Pixel 7a was launched in the second quarter, whereas the Pixel 6a launch occurred in the third quarter last year. Looking ahead, the launch timing change will be a headwind to Hardware revenue growth in the third quarter.<\/p>

 <\/p>

Play returned to positive growth in the second quarter, driven primarily by a solid increase in the number of buyers.<\/p>

 <\/p>

Turning to Google Cloud, we are particularly excited about the customer interest in our AI-optimized infrastructure, our large language models, our AI platform services, and our new generative AI offerings such as Duet AI for Google Workspace, although we are still clearly in the early days.<\/p>

 <\/p>

At the same time, we continued to experience headwinds in the second quarter from moderation in consumption growth as customers optimized their spend. We continue to invest aggressively, while remaining focused on profitable growth.<\/p>

 <\/p>

In terms of expenses and profitability, we remain very focused on durably re-engineering our cost base.<\/p>

 <\/p>

Most evident to date are the actions we have taken to reduce the pace of headcount growth, including the workforce reductions we announced in the first quarter, and a slower pace of organic hiring, in part given our focus on reallocating talent from within to fuel our growth priorities.<\/p>

 <\/p>

A quick comment on the sequential improvement in operating margins in the second quarter. There are two factors to note. First, the benefit from an acceleration in Search advertising revenue growth in the second quarter. Second, the vast majority of the charges related to our workforce reduction and optimization of our global office space were taken in Q1.<\/p>

 <\/p>

Finally, as it relates to capex, in Q2, the largest component was for servers, which included a meaningful increase in our investments in AI compute.<\/p>

 <\/p>

The sequential step-up in the second quarter was lower than anticipated for two reasons.<\/p>

 <\/p>

First, with respect to office facilities, we continue to moderate the pace of fit-outs and ground-up construction to reflect the slower expected pace of headcount growth. Second, there were delays in certain data center construction projects.<\/p>

 <\/p>

We expect elevated levels of investment in our technical infrastructure, increasing through the back half of 2023 and continuing to grow in 2024. The primary driver is to support the opportunities we see in AI across Alphabet, including investments in GPUs and proprietary TPUs, as well as data center capacity.<\/p>

 <\/p>

With all that said, we remain committed to durably re-engineering our cost base in order to help create capacity for these investments in support of long-term, sustainable financial value.<\/p>

 <\/p>

Thank you. Sundar, Philipp and I will now take your questions.<\/p>

 <\/p>

Operator:<\/strong> Thank you. As a reminder, to ask a question you will need to press star *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>

 <\/p>

Our first question comes from Brian Nowak of Morgan Stanley. Please go ahead.<\/p>

 <\/p>

Brian Nowak (Morgan Stanley):<\/strong> Thanks for taking my questions. I have two. The first one for Sundar.<\/p>

 <\/p>

Sundar, I would 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?<\/p>

 <\/p>

And then the second one for Ruth. Ruth, congrats on the new position. One question just about the durable expense comments. I think last quarter you talked about the idea that expenses could grow slower than revenue in 2024. Is that still the right way to think about it? And just to confirm, does that include the impact of depreciation in those comments? Thanks.<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> 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.<\/p>

 <\/p>

I wouldn’t say surprise. So, for example, people really using it for coding is something we understood, but it’s definitely on the new side.<\/p>

 <\/p>

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, then, how much it has grown over the last two years, since we’ve been doing this for a while. But definitely that and 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.<\/p>

 <\/p>

And 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.<\/p>

 <\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> And on your second question, Brian, we are really pleased with the operating performance in the second quarter. We have been saying for some time that we are focused on revenue growth ahead of expense growth and achieved that for the first time in some time, and that is cost of sales plus operating expenses overall. And we do remain very focused on durably re-engineering our cost base. There are a lot of work streams that are in flight, and I mentioned a couple of them in opening comments. This remains a major priority, as Sundar and I both commented on.<\/p>

 <\/p>

Brian Nowak (Morgan Stanley):<\/strong> Great. Thank you, both.<\/p>

 <\/p>

Operator:<\/strong> Thank you.<\/p>

 <\/p>

The next question comes from Eric Sheridan of Goldman Sachs. Please go ahead.<\/p>

 <\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thank you so much for taking the questions. Maybe one for Sundar and one also for Ruth.<\/p>

 <\/p>

Sundar, can you talk a little bit about elements of open source versus closed and things like custom silicon and how you’re thinking about AI offerings broadly developing over the next couple years, and what you see as some of the key differentiation points that Google, either through their Cloud business or the consumer offerings, are going to bring to market and how we should think about differentiation playing out to a greater degree in AI in the years ahead. That will be number one.<\/p>

 <\/p>

And then, Ruth, I’ll echo Brian’s congrats as well on the new role. Maybe both of you could talk to why this type of role might be important at this point in time for Alphabet; and Ruth, what you’re looking to sort of drive into the organization from this new role as you move into it in the fall. Thanks.<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Eric.<\/p>

 <\/p>

On the first part, obviously a big topic. I would broadly say that investments for AI, when you look at the type of deep computer science work, the talent we have worked hard to bring to the company and from the ground up, the infrastructure we have built.<\/p>

 <\/p>

From the earliest days Google has been a company, we have thought about the switches in our data centers. Wherever we think we can do the best and get an advantage by innovating, we have chosen to do so. We have done that on AI on the silicon side.<\/p>

 <\/p>

But what’s important to us is really stay focused on our users and customers and support all the innovations that’s needed. So, for example, with Cloud, we’ve really embraced open architecture. We have embraced customers wanting to be multicloud when it makes sense for them.<\/p>

 <\/p>

So similarly, you would see with AI, we will embrace -- we will offer not just our first-party models; we’ll offer third-party models, including open source models. I think open source has a critical role to play in this ecosystem.<\/p>

 <\/p>

Google is one of the largest contributors, if you look at Hugging Face in terms of the contribution there, when you look at projects like Android, Chromium and so on, Kubernetes and so on. So we’ll embrace that and we’ll stay at the cutting edge of technology. I think that will serve us well for the long term.<\/p>

 <\/p>

On the second part of your question, first of all, I’m very grateful and thankful to all the work that Ruth has done for the company. It’s too invaluable to capture in words.<\/p>

 <\/p>

I am super thrilled that she is going to continue on an impactful new role, and at the scale of our company with the broad changes in technology, I think it’s more important than ever before to engage on these issues globally at scale, and advocate on the economic opportunity of the investments we make across Alphabet and Google.<\/p>

 <\/p>

And I’m glad that she’s going to continue as CFO, and so no changes there. And we’ll take the time to find a successor, and Ruth will be closely involved not just on that but also our long-range planning, including 2024.<\/p>

 <\/p>

Ruth, anything to add?<\/p>

 <\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> Just to underscore when you asked 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 are continuing to execute against those.<\/p>

 <\/p>

And then I think Sundar summarized it well. We see technology can make such a difference in the lives of so many and the 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.<\/p>

 <\/p>

And so focusing there as well as the investments that we make across Alphabet to drive economic growth globally across numerous sectors.<\/p>

 <\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Great, thank you.<\/p>

 <\/p>

Operator:<\/strong> Thank you. The next question comes from Doug Anmuth of JPMorgan. Please go ahead.<\/p>

 <\/p>

Doug Anmuth (JPMorgan):<\/strong> Thanks for taking the questions. One for Sundar and one for Ruth.<\/p>

 <\/p>

First, Sundar. Curious, how do you think about timing for more broadly integrating generative AI into Search? More specifically, what are some of the things you’ll need to see to do that?<\/p>

 <\/p>

And then, Ruth, just on capex, the 2Q capex lower than expected, as you explained. Do you still expect modestly higher capex in ’23 versus ’22? And then I know it’s getting a little bit ahead, but how should we think about kind of timing of that real estate and office optimization efforts through ’23 and then also into ’24? Thanks.<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> 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.<\/p>

 <\/p>

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 the experience.<\/p>

 <\/p>

So I would say, we are ahead of where I thought we would be at this point in time, and the feedback has been very positive. We’ve just improved our efficiency pretty dramatically since the product launched. The latency has improved significantly. We are keeping a very high bar, but I would say we are ahead on all the metrics in terms of how we look at it internally, and so couldn’t be more pleased with it.<\/p>

 <\/p>

And so you will see us continue to bring it to more and more users, and over time this will just be how Search works. And so while we are taking deliberate steps, we are building the next major evolution in Search, and I’m pleased with how it’s going so far.<\/p>

 <\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> In terms of capex, I tried to lay out sort of the cadence of capex and the point, it’s an important one, that the sequential step-up in the second quarter was lower than anticipated for the two reasons I noted. One, the work that we’re doing around office facilities and then the delays in certain data center construction projects.<\/p>

 <\/p>

That’s why we wanted to be really clear that we do expect elevated levels of investment in our technical infrastructure, and that would be increasing through the back half of 2023, consistent with the comments we’ve made previously that we expected 2023 to be higher and given the slower start at the front half of the year and then continuing to grow into 2024.<\/p>

 <\/p>

And the primary driver of this, as you know well, is to support the opportunities we see in AI across the company, including the investments that we’ve already talked about: proprietary TPUs, all that we’re doing with GPUs, as well as data center capacity. And as we continue to see the pace of innovation accelerate, we just want to make sure we’re positioned to address the opportunity across Alphabet.<\/p>

 <\/p>

And to the other part of your question, when we look at real estate optimization, that’s one of many work streams that are important when we talk about durably re-engineering our cost base to create capacity for investments and support long-term sustainable financial value. And we are continuing to work against that.<\/p>

 <\/p>

Doug Anmuth (JPMorgan):<\/strong> Thank you, both.<\/p>

 <\/p>

Operator:<\/strong> Thank you. The next question comes from Lloyd Walmsley of UBS. Please go ahead.<\/p>

 <\/p>

Lloyd Walmsley (UBS):<\/strong> Thanks a lot for taking the question. I wanted to just follow up on 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? 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.<\/p>

 <\/p>

But how do you guys see that playing out, and what can you share there?<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Maybe I can give some color here.<\/p>

 <\/p>

We’ve obviously been focused on bringing this experience and making sure it works well for users. And it’s very clear to me, first of all, as a user myself, there are certain queries for which the answers are so, so significantly better. It’s a clear quality win. And so I think we are definitely headed in the right direction, and we can see it in our metrics and the feedback we’re getting from our users as well.<\/p>

 <\/p>

And the thing that doesn’t change with these experiences is that a lot of user journeys are commercial in nature. There are inherent commercial user needs. And what’s exciting to me is that SGE gives us an opportunity to serve those needs, again, better, right? Better.<\/p>

 <\/p>

So it’s clearly an exciting area. And as part of that, the fundamentals don’t change. Users have commercial needs and they are looking for choices, and there are merchants and advertisers looking to provide those choices. So those fundamentals are true in SGE as well.<\/p>

 <\/p>

And we have a number of experiments in flight, including ads, and we are pleased with the early results we are seeing. And so we will continue to evolve the experience, but I’m comfortable at what we’re seeing, and we have a lot of experience working through these transitions and will bring all those learnings here as well.<\/p>

 <\/p>

Lloyd Walmsley (UBS):<\/strong> All right. Thank you.<\/p>

 <\/p>

Operator:<\/strong> Thank you. The next question comes from Justin Post of Bank of America. Please go ahead.<\/p>

 <\/p>

Justin Post (Bank of America):<\/strong> Great, thank you. Just ask about the Cloud. It really looked like revenue growth stabilized despite optimization. So could you talk about the pipeline and the client wins in the quarter, how you feel about those.<\/p>

 <\/p>

And then any uptick, are you seeing, related to AI spending in the total revenues this quarter or in the second half? Thank you.<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Justin.<\/p>

 <\/p>

Look, 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.<\/p>

 <\/p>

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.<\/p>

 <\/p>

The 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.<\/p>

 <\/p>

Second, it gives us an opportunity to upsell and cross-sell into our installed base. So, for example, if you think about Duet AI and Google Workspace now, it’s a collection of all our generative AI-powered collaboration features. We can bring it and make it available to more than 9 million paying Google Workspace customers.<\/p>

 <\/p>

Similarly, Duet AI and Google Cloud, again, allows us to go back to our installed base and engage in deeper conversations.<\/p>

 <\/p>

And, finally, I think AI helps us differentiate our core products. For example, if you take a look at cybersecurity, we are deeply incorporating AI to drive profound changes there.<\/p>

 <\/p>

So overall, I’m excited, excited. And I view this as a long-term opportunity. And all the investments we are doing in AI across Alphabet, including the work we are doing in Google DeepMind and Google Research on Gemini and so on are directly applicable to Cloud as well. So, excited about it.<\/p>

 <\/p>

Justin Post (Bank of America):<\/strong> Great, thank you. Maybe one follow-up for Ruth.<\/p>

 <\/p>

Did the infrastructure Cloud grow faster than Workspace’s again this quarter?<\/p>

 <\/p>

Ruth Porat, CFO Alphabet and Google:<\/strong> So I don’t think we commented on that. Yes, in the second quarter, GCP growth was above the growth rate for Cloud overall.<\/p>

 <\/p>

Justin Post (Bank of America):<\/strong> Great. Thank you.<\/p>

 <\/p>

Operator:<\/strong> Thank you. The next question comes from Michael Nathanson of MoffettNathanson. Please go ahead.<\/p>

 <\/p>

Michael Nathanson (Moffett):<\/strong> Thanks. I have one for Philipp and one for Sundar.<\/p>

 <\/p>

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, smaller digital companies. They’re all slowing. And the macro backdrop’s definitely cloudy. Yet, you guys accelerated your growth this quarter.<\/p>

 <\/p>

What factors are you looking at, do you see that would identify why you are growing while others are really struggling and slowing down?<\/p>

 <\/p>

And then, Sundar, I think you spent over $100 billion on R&D over the past five years. And, yet, there’s a narrative that it’s so competitive and so expensive to compete going forward. Can you talk a bit about how you’re revisiting that R&D spend? Any near-term cadence updates you can give us for growth? And any factors that could change the growth going forward for research and development spending for you guys? Thanks.<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Maybe I can comment on how we think about R&D.<\/p>

 <\/p>

And, look, if anything, I think two 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.<\/p>

 <\/p>

We are definitely – as Ruth mentioned on AI investments, we are going to be committed to making sure we invest to realize the opportunity. But all the work we are doing on efficiency and optimization applies on the AI side as well. And so we are bringing all that lens there so that we do this responsibly.<\/p>

 <\/p>

But no overall changes in our philosophy, our approach there. And maybe I’ll let Philipp comment on the overall market dynamics.<\/p>

 <\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yes. Look, I can’t comment on others, but our focus continues, obviously, to be helping customers through whatever uncertainty or complexity they are facing. A lot of companies are focused on profitability, driving efficiencies and they are carefully evaluating the effectiveness of their budgets. Our goal is really to help them maximize efficiency and drive strong ROI. And I think we have the proven AI-powered tools and solutions to actually do it.<\/p>

 <\/p>

I called out Search and Other Revenues being led by solid growth in the retail vertical. We talked about the DR and brand side on the YouTube side. I think those are the key points I would make.<\/p>

 <\/p>

Michael Nathanson (Moffett):<\/strong> Thank you.<\/p>

 <\/p>

Operator:<\/strong> Thank you. The next question comes from Ken Gawrelski of Wells Fargo. Please go ahead.<\/p>

 <\/p>

Ken Gawrelski (Wells Fargo):<\/strong> Yes, thank you so much for the opportunity. Appreciate that.<\/p>

 <\/p>

Can I ask, on Performance Max, you’ve had great success there. Could you talk about any vertical or use case expansions? And how long until we possibly get to the point of more automated AI-generated creative in production?<\/p>

 <\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yeah, look, this is a great question. AI is a foundational component that really allows us to help users, advertisers, pubs [publishers], 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.<\/p>

 <\/p>

And Performance Max is an example of how all this comes together at scale. For advertisers, they provide us with a business goal, a set of assets, and we can then take care of the rest to meet consumer demand and really deliver on advertiser ROI. And as you heard it at GML, we have seen over many quarters, we continue to build new AI features really on top of this.<\/p>

 <\/p>

I think I talked a bit in my prepared remarks about where we’re taking some of our products from a Gen AI perspective. And if you take a look at some of the things we announced there, it’s fair to say, whether you look at our revamped asset creation flow in Performance Max, whether you look at automatically created assets, whether you look at Product Studio and so on, that we’re on the right path to deliver some really exciting new innovation in automated -- we call it asset creation in the broadest sense.<\/p>

 <\/p>

Ken Gawrelski (Wells Fargo):<\/strong> Thank you.<\/p>

 <\/p>

Operator:<\/strong> Thank you. Our last question comes from Mark Mahaney of Evercore. Please go ahead.<\/p>

 <\/p>

Mark Mahaney (Evercore ISI):<\/strong> Okay, actually, I’ll follow up on that last question, Philipp. You pointed out AI has been used to improve the advertising mouse trap 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? And if you think about where generative AI would have the most impact, could you peel it apart? What’s your guess now over the next couple years where it will have the most impact: on the creative, on the audience creation, on the campaign optimization? Where do you think the most impact will come from generative AI just for all your advertising customers? Thanks.<\/p>

 <\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Look, as I said earlier, generative AI is super-charging new and existing ads products with really tons of potential ahead. We’re really helping advertisers here make better decisions, solve problems, enhance creativity and I covered this earlier.<\/p>

 <\/p>

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. When I talk to customers, they are very excited about AI and understandably have some questions.<\/p>

 <\/p>

One of the top questions is, for example: What’s the next best step I should take? This is a key reason why we launched our Google Ads AI Essentials, which was a big announcement at GML. It’s a checklist of simple steps customers can take right now to unlock the power of AI. It has to do with the foundation of data and measurement. It has to do with taking action with our AI products. It really is a mindset shift to set up organizations for AI success.<\/p>

 <\/p>

So those are just some of the examples. If you extrapolate those going forward, those are some of the examples where I see a lot of the upside, apart from the points that Sundar already mentioned.<\/p>

 <\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> I think all of this is before we have multimodal capabilities really in the mix. And so looking at the early innovations there, I think it’s going to be an exciting couple years ahead. Thanks, Mark.<\/p>

 <\/p>

Mark Mahaney (Evercore ISI):<\/strong> Thank you, Sundar. Thank you, Philipp. Congratulations, Ruth.<\/p>

 <\/p>

Operator:<\/strong> 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.<\/p>

 <\/p>

Jim Friedland, Director Investor Relations:<\/strong> 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.<\/p>

 <\/p>

Operator:<\/strong> Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.

Operator:<\/strong> Welcome, everyone.<\/p>

Thank you for standing by for the Alphabet third quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone. I would now like to hand the conference over to your speaker today Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thank you.<\/p>

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. Now I’ll quickly cover the Safe Harbor.<\/p>

Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>

Actual results could differ materially. Please refer to our Form 10-K, including our risk factor section and our Form 10-Qs. We undertake no obligation to update any forward-looking statement.<\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>

Our comments will be on year-over-year comparisons unless we state otherwise. And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thank you, Jim. And hello, everyone.<\/p>

I’m pleased with our business results this quarter, which demonstrate strong growth in Search and YouTube, and momentum in Cloud.<\/p>

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.<\/p>

Our product momentum continued this quarter, as you saw with Cloud Next, Made on YouTube and Made by Google. It’s all part of our focus on making AI more helpful for everyone, and we are making good progress across the four areas that we shared last quarter.<\/p>

First, improving knowledge and learning. This includes our work with the Search Generative Experience, which is our experiment to bring generative AI capabilities into Search.<\/p>

We’ve learned a lot from people trying it, and we’ve added new capabilities, like incorporating videos and images into responses and generating imagery. We’ve also made it easier to understand and debug generated code.<\/p>

Direct user feedback has been positive, with strong growth in adoption.<\/p>

In August, we opened up availability to India and Japan, with more countries and languages to come.<\/p>

As we add features and expand into new markets, we’re engaging with the broader ecosystem and will continue to prioritize approaches that add value for our users, send valuable traffic to publishers, and support a healthy, open Internet.<\/p>

With generative AI applied to Search, we can serve a wider range of information needs and answer new types of questions, including those that benefit from multiple perspectives.<\/p>

We are surfacing more links with SGE, and linking to a wider range of sources on the results page, creating new opportunities for content to be discovered.<\/p>

Of course, ads will continue to play an important role in this new Search experience. People are finding ads helpful here, as they provide useful options to take action and connect with businesses.<\/p>

We’ll experiment with new formats native to SGE that use generative AI to create relevant, high-quality ads, customized to every step of the search journey.<\/p>

The second area we are focused on is boosting creativity and productivity. Bard is particularly helpful here; it’s a direct interface to a conversational LLM, and we think of it as an early experiment and complementary experience to Google Search.<\/p>

Bard can now integrate with Google apps and services, showing relevant information from Workspace, Maps, YouTube, and Google Flights and hotels.<\/p>

We’ve also improved the “Google it” feature. It provides other sources to help people evaluate Bard’s responses and explore information across the web.<\/p>

Earlier this month, we announced Assistant with Bard -- a personal assistant powered by generative AI. It combines Bard’s generative and reasoning capabilities with Assistant’s personalized help. You can interact with it through text, voice or images, and in the coming months, you’ll be able to opt in on Android and iOS mobile devices.<\/p>

Our collaborative tools in Workspace and YouTube are also part of how we boost creativity and productivity, and they are seeing great initial traction.<\/p>

Third, we are enabling developers, businesses and other organizations to build their own transformative products and services. For example, thousands of customers and partners are already using Google Cloud to capture the potential of AI, and we’ll share more there in a minute.<\/p>

And fourth, we are building and deploying AI responsibly, so that everyone can benefit. One area we are focused on is making sure people can more easily identify when they are encountering AI-generated content online. Using new technology powered by Google DeepMind SynthID, images generated by Vertex AI can be watermarked in a way that is invisible to the human eye, without reducing the image quality.<\/p>

Underlying all this work is the foundational research done by our teams at Google DeepMind and Google Research. We are excited to roll out more of what they’ve been working on soon.<\/p>

As we expand access to our new AI services, we continue to make meaningful investments in support of our AI efforts. We remain committed to durably re-engineering our cost base in order to help create capacity for these investments, in support of long-term, sustainable financial value. Across Alphabet, teams are looking at ways to operate as effectively as possible, focused on their biggest priorities.<\/p>

Turning next to YouTube, which saw solid momentum in both its ads and subscription businesses in Q3.<\/p>

NFL Sunday Ticket is now live and receiving excellent reviews. Fans love our multiview feature, which can livestream up to four games on a single screen. We have heard positive feedback from our partners at the NFL about the new features and livestream reliability. This is a clear example of our ability to execute big partnerships with excellence and at scale.<\/p>

I’m really pleased with the growth and engagement on YouTube Shorts. We continue to work on closing the monetization gap here. Shorts now average over 70 billion daily views and are watched by over 2 billion signed-in users every month.<\/p>

At Made On YouTube in September, we announced new tools that make it easier to create engaging content. Dream Screen is an experimental feature that allows creators to add AI-generated video or image backgrounds to Shorts. And YouTube Create is a new mobile app with a suite of production tools for editing Shorts, longer videos or both.<\/p>

Next, Google Cloud. We see continued growth, with Q3 revenue of $8.4 billion, up 22%.<\/p>

Today, more than 60% of the world’s thousand-largest companies are Google Cloud customers. At Cloud Next, we showcased amazing innovations across our entire portfolio of Infrastructure, Data and AI, Workspace Collaboration, and Cybersecurity solutions.<\/p>

We offer advanced AI-optimized infrastructure to train and serve models at scale, and today, more than half of all funded generative AI startups are Google Cloud customers. This includes AI21 Labs, Contextual, Elemental Cognition, Writer, and more.<\/p>

We continue to provide the widest choice of accelerator options. Our A3 VMs powered by NVIDIA’s H100 GPU are generally available, and we are winning customers with Cloud TPU v5e, our most cost-efficient and versatile accelerator to date.<\/p>

On top of our infrastructure, our Vertex AI platform helps customers build, deploy and scale AI-powered applications. We offer more than 100 models -- including popular third-party and open-source models, as well as tools to quickly build Search and Conversation use cases. From Q2 to Q3, the number of active generative AI projects on Vertex AI grew by 7X, including Highmark Health, which is creating more personalized member materials.<\/p>

Duet AI was created using Google’s leading large foundation models and is specially trained to help users to be more productive on Google Cloud. We continue expanding its capabilities and integrating it across a wide range of Cloud products and services.<\/p>

With Duet AI, we’re helping leading brands like PayPal and Deutsche Bank boost developer productivity. And we are enabling retailers like Aritzia and Gymshark to gain new insights for better and faster business results. In fact, companies are increasingly using AI for the purpose of analyzing data, and customers are choosing Google Cloud because we are the only large cloud provider with a unified platform to analyze structured and unstructured data.<\/p>

In Workspace, thousands of companies and more than a million trusted testers have used Duet AI. They are writing and refining content in Gmail and Docs, creating original images from text within Slides, organizing data in Sheets, and more. These innovations enable us to provide new services and grow our base of 10 million paying customers, including enterprises like Grupo Boticario, Unilever and Warner Music.<\/p>

We also integrated Duet AI across our cybersecurity portfolio to differentiate in the marketplace, providing generative AI-powered assistance in Mandiant Threat Intelligence, Chronicle Security Operations and Security Command Center. This reduces the time security teams spend writing, running and refining searches by seven times. We are the only leading security provider that combines frontline intelligence and expertise, a modern security operations platform, and a trusted cloud foundation, all infused with generative AI -- helping protect customers and partners like BT, Jack Henry and Associates, and CoverMyMeds.<\/p>

Turning to hardware. We unveiled our new products this month. We introduced our new Pixel 8, Pixel 8 Pro and Pixel Watch 2 to very positive consumer feedback and reviews. Pixel is the fastest-growing smartphone brand in our top markets, and the only one that grew in units sold year over year.<\/p>

Our portfolio of Pixel products are brought to life thanks to our combination of foundational technologies -- AI, Android and Google Tensor. Google Tensor G3 is the third generation of our tailor-built chip. It’s designed to power transformative experiences by bringing the latest in Google AI research directly to our newest phones.<\/p>

And new AI-powered editing features in Google Photos on Pixel 8 and Pixel 8 Pro remove distractions, generate the best shot from multiple images, and reduce distracting sounds in videos. Pixel and our third-party ecosystem are powered by Android. We just released Android 14 with more accessibility features.<\/p>

I also want to mention Chromebooks Plus, a new category which provides the best of Chrome on great hardware, with built-in Google apps and powerful AI capabilities. We also shared that Chromebooks will now get regular automatic updates for 10 years -- more than any other operating system.<\/p>

In Other Bets, Waymo is onboarding more riders to its commercial ride-hailing service as it gradually adds over 100,000 people from its San Francisco waitlist. Austin will follow as its next ride-hail city.<\/p>

Wing and Walmart announced a new partnership to provide drone delivery service in the Dallas-Fort Worth area.<\/p>

Before handing over to Philipp, I want to thank our employees around the world who are working to create innovative products and provide great services to people and businesses who use our products.<\/p>

Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar. And hi, everyone.<\/p>

I’ll start with our performance for the quarter and then give color into the three key priority areas for Ads -- Google AI, Retail, and YouTube -- that we’ve identified on past calls as opportunities for long-term growth in advertising.<\/p>

Google Services revenues of $68 billion were up 11% year-on-year.<\/p>

In Google Advertising, Search & Other, revenues grew 11% year-on-year, led by solid growth in the Retail vertical. In YouTube Ads, revenues were up 12% year-on-year, driven by growth in both brand and direct response. In Network, revenues declined 3% year-on-year.<\/p>

Google Other revenues were up 21% year-on-year, led by strong growth in YouTube subscription revenues.<\/p>

Let’s start with Google AI. Recent dramatic advances in everything from foundational research models, to LLMs, to generative AI are improving our ability to deliver better performance and profitability for advertisers and more helpful, delightful experiences for users.<\/p>

We covered many innovations last quarter after GML, like our conversational experience in Google Ads, significant updates to Performance Max and new campaign types like Demand Gen. And as Sundar said, we’re continuing to experiment with new ad formats on SGE. It’s extremely important to us that in this new experience, advertisers still have the opportunity to reach potential customers along their search journeys. I’ll highlight more ways we’re innovating with the best of Google AI as we double-click into our core business.<\/p>

In retail, we had a great quarter. In a market where every dollar counts, our proven AI-powered solutions like Search and PMax are helping retailers drive reliable, strong ROI and meet customers wherever they are across the funnel. In Q3, we also started prepping retailers for what will be a long holiday season.<\/p>

Let me share some themes.<\/p>

Number one - With the maximum number of days between Thanksgiving and Christmas -- and expectations for many micro-peaks beyond Cyber 5 -- we’re arming businesses with insights and planning tools, including Optiscore and Performance Planner, to uncover new opportunities, plan budgets and targets to stay competitive, and be smarter with their inventory and pricing strategy.<\/p>

Number two - Consumer expectations are shifting, especially around price and convenience. We’ve seen 4X “deals’’ queries during the holidays versus other periods. 75% of users say they’ll shop with those offering free shipping. Retailers are capitalizing on these trends with our differentiated merchant offerings like merchant promotions and fulfillment options, and we’re making improvements to significantly boost the number of deals shown to shoppers in Search this holiday season. Look out for more in the coming days about new ways we’ll help shoppers browse deals across the web this year.<\/p>

Number three - No surprise, Omnichannel is the way to succeed. With our suite of omni-product solutions including Local Inventory Ads, omnibidding, and PMax for Store Goals, retailers big and small are capturing demand and incremental store budgets while engaging with high-value customers.<\/p>

Innovation continues across our shopping and merchant experiences, powered by Google AI. Our virtual try-on tool for apparel launched in June and has been a hit with consumers and brands. Users engage with virtual try-on images at a higher rate versus regular brand-provided images.<\/p>

Product Studio is another launch from GML getting positive feedback in pilot mode. It uses the best of gen AI to help businesses create unique and tailored imagery for free that they can then scale across their channels. We’re seeing early merchant testers using it to “seasonalize” their content for the holidays.<\/p>

Let’s shift to YouTube. It’s worth repeating: our intense focus on creator success coupled with our multiformat strategy are at the center of how we think about YouTube’s long-term growth. Shorts, Connected TV and our subscription offerings are key drivers here, and we’re investing across each to solidify YouTube’s position as the best place to create, the best place to watch and the best place to deliver results.<\/p>

Sundar mentioned watchtime and engagement momentum on Shorts as well as our monetization progress. He also covered subscription growth and NFL Sunday Ticket. As for Connected TV, we continue to be the number one overall streaming destination according to Nielsen. 150 million+ people are watching YouTube on CTV screens every month in the U.S.<\/p>

Whether it’s music videos, NFL Sunday Ticket, free movies, Shorts, a continuous stream of MrBeast or some other creator-led content, viewers want choice and variety and we’re giving it to them all in one place.<\/p>

And to help creators and advertisers connect with these billions of viewers across moments, screens and formats, we’re bringing Google AI to awesome new creation tools and ad solutions.<\/p>

AI will do wonders for creation and storytelling. From Dream Screen and YouTube Create -- which Sundar talked about -- to features that autodub content in multiple languages, flip and trim existing assets, remix and clip videos, and more, we’re just getting started.<\/p>

We’re also helping brands break through at speed and scale across the funnel to drive results. Spotlight Moments launched last week. It uses AI to identify trending content around major cultural moments for brand sponsorship opportunities.<\/p>

There’s Video Reach Campaigns, which are expanding to in-feed and Shorts and will be generally available in November. AI is helping advertisers find as many people as possible in their ideal audience for the lowest possible price. Early tests are delivering 54% more reach at 42% lower cost.<\/p>

And then with Video View campaigns, AI is serving skippable ads across in-stream, in-feed, and Shorts and helping advertisers earn the maximum number of views at the lowest possible cost. So far, they’re driving 40% more views, on average, versus in-stream alone.<\/p>

Then for YouTube and other feed-based surfaces, there’s our new Demand Gen campaign which launched in April, rolled out worldwide last week, and was designed for the needs of today’s social marketers to engage people as they stream, scroll and connect. It combines video and image ads in one campaign, with access to 3 billion users across YouTube and Google, and the ability to optimize and measure across the funnel using Google AI. Demand Gen is already driving success for brands like Samsung and Toyota.<\/p>

Before I wrap, one quick highlight on our close collaboration and commitment to our most important ecosystems and partners.<\/p>

In July, we launched Google News Showcase in the U.S., our curated online news experience and licensing program, with more than 150 news publications, 90% of which are local or regional. Globally, over 2,500 news publications have signed on to News Showcase, and the product is live in 23 countries to date. Our commitment to open access to news and information remains strong.<\/p>

With that, I’ll end with a thank you to our customers and partners around the world for their continued trust and collaboration, and our Googlers everywhere for their incredible hard work and dedication.<\/p>

Ruth, over to you.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> Thank you, Philipp.<\/p>

We are very pleased with our financial results for the third quarter, driven by meaningful growth in Search and YouTube, and momentum in Cloud.<\/p>

My comments will be on year-over-year comparisons for the third quarter, unless I state otherwise.<\/p>

I will start with results at the Alphabet level, followed by segment results, and conclude with our outlook.<\/p>

For the third quarter, our Consolidated Revenues were $76.7 billion, up 11% in both reported and constant currency. Search remained the largest contributor to revenue growth.<\/p>

In terms of expenses, Total Cost of Revenues was $33.2 billion, up 7%, primarily reflecting Other Cost of Revenues of $20.6 billion, which was up 6%.<\/p>

Growth here was primarily driven by Content Acquisition Costs, mainly for YouTube subscription offerings.<\/p>

As noted in our earnings release, the overall increase in data center and other operations costs was partially offset by a reduction in depreciation expense due to the change in estimated useful lives we made starting in the first quarter of the year.<\/p>

Operating expenses were $22.1 billion, up 6%, reflecting the following: First, an increase in R&D expenses, driven primarily by compensation; second, an increase in G&A expenses reflecting the impact of charges related to legal matters; and finally, Sales & Marketing expenses, which were relatively flat to last year.<\/p>

Operating income was $21.3 billion, up 25%, and our operating margin was 28%.<\/p>

Other Income & Expense was a loss of $146 million.<\/p>

Net income was $19.7 billion. This reflects an effective tax rate of 7% in the third quarter from an IRS change related to the use of foreign tax credits which had an outsized impact on the third-quarter rate, because the change resulted in a catch-up for prior periods.<\/p>

We delivered Free Cash Flow of $22.6 billion in the third quarter and $78 billion for the trailing 12 months.<\/p>

We ended the quarter with $120 billion in cash and marketable securities. As a reminder, our cash balance and free cash flow in the second and third quarters benefited from the deferral of certain tax payments to the fourth quarter of 2023. As noted in our earnings release, on October 16 we made an estimated tax payment of $10.5 billion related to this deferral, which will be reflected in our cash balance and free cash flow in the fourth quarter.<\/p>

Turning to segment results, within Google Services, Revenues were $68 billion, up 11%.<\/p>

Google Search and Other advertising revenues of $44 billion in the quarter were up 11%, led again by growth in retail.<\/p>

YouTube advertising revenues of $8 billion, were up 12% driven by both brand advertising and direct response.<\/p>

Network advertising revenues of $7.7 billion were down 3%.<\/p>

Other Revenues were $8.3 billion, up 21%, primarily reflecting growth in YouTube non-advertising revenues, driven by subscriber growth in YouTube TV, followed by YouTube Music Premium.<\/p>

TAC was $12.6 billion, up 7%.<\/p>

Google Services Operating Income was $23.9 billion, up 27%, and the operating margin was 35%.<\/p>

Turning to the Google Cloud segment, revenues were $8.4 billion for the quarter, up 22%. GCP revenue growth remained strong across geographies, industries and products, although the Q3 year-on-year growth rate reflects the impact of customer optimization efforts. Google Workspace also delivered strong revenue growth, primarily driven by increases in average revenue per seat. Google Cloud had Operating Income of $266 million, and the operating margin was 3%.<\/p>

As to our Other Bets, for the third quarter, revenues were $297 million and the operating loss was $1.2 billion.<\/p>

Turning to our outlook for the business, with respect to Google Services.<\/p>

First, within Advertising, after a period of historic volatility, we were pleased with the year-on-year revenue growth of Search and YouTube advertising in the third quarter.<\/p>

Second, within Other Revenues, in our YouTube subscription products, the substantial growth in revenues primarily reflects subscriber growth.<\/p>

Looking ahead, a full quarter of NFL Sunday Ticket revenues, as well as associated content acquisition costs, will be reflected in Q4 results, compared to only a few weeks in the third quarter.<\/p>

Play had solid growth in the third quarter, driven primarily by an increase in the number of buyers.<\/p>

With respect to Hardware, there is a headwind to revenues in the fourth quarter, reflecting efforts to optimize the portfolio with tighter targeting of our go-to-market investments, as well as the ongoing impact from the difference in launch timing for the Pixel 6a and 7a that we mentioned last quarter.<\/p>

Turning to Google Cloud, we are pleased with the ongoing customer engagement with GCP and Workspace, and the potential benefit of our AI solutions -- including infrastructure and services such as VertexAI and Duet.<\/p>

We continue to invest aggressively, given the significant potential we see, while remaining focused on profitable growth.<\/p>

In terms of expenses and profitability, we’re pleased with our operating performance.<\/p>

As we have repeatedly stressed, we remain focused on durably re-engineering our cost base to create investment capacity to support our growth priorities, most important of which is with AI. We have a number of workstreams in place:<\/p>

First, we are maintaining a slower pace of headcount growth, reflecting product prioritization and reallocation of talent to support our most important growth opportunities.<\/p>

Second, we remain focused on optimizing our real estate footprint, including how and where we work, to reduce our expense growth. As you can see from our earnings release, we incurred $207 million in accelerated rent and depreciation in the third quarter related to these actions.<\/p>

Third, we have engineering workstreams underway to improve productivity across Alphabet. Given the magnitude of investment in our technical infrastructure, we have a superb team focused on efficiency of our operations there. We are also making progress in streamlining operations across Alphabet through the use of AI.<\/p>

Finally, there are ongoing workstreams that are improving the efficiency of our spend with suppliers and vendors through our central procurement organization.<\/p>

And to be clear, across the portfolio of Other Bets companies, we have also been working to identify opportunities to create sharper focus and to operate more efficiently and effectively.<\/p>

With respect to sequential quarter-on-quarter trends, two further points: First, Cost of Sales in the fourth quarter will reflect both higher hardware costs given Pixel family launches, as well as increased CAC for YouTube as previously noted. Second, as usual, we expect Sales and Marketing expenses to be more heavily weighted to the end of the year in part to support product launches and the holiday season.<\/p>

Finally, our reported capex in Q3 was $8 billion, driven overwhelmingly by investment in our technical infrastructure, with the largest component for servers, followed by data centers, reflecting a meaningful increase in our investments in AI compute.<\/p>

The growth in reported cash capex in Q3 is somewhat muted due to the timing of supplier payments, which can cause variability from quarter to quarter.<\/p>

We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.<\/p>

In closing, we remain very excited about the opportunities ahead and committed to deliver sustainable financial value.<\/p>

Thank you.<\/p>

Sundar, Philipp and I will now take your questions.<\/p>

Operator:<\/strong> Thank you.<\/p>

As a reminder, to ask a question you will need to press star *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been asked. And our first question comes from Brian Nowak with Morgan Stanley. Your line is open.<\/p>

Brian Nowak (Morgan Stanley):<\/strong> Great. Thanks for taking my questions. I have two. The first one is somewhat of a jump ball. There is somewhat of an investor debate about 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?<\/p>

And the second one, Ruth, I know you have spoken a lot about durably re-engineering the cost base. I think in the past you talked about how expenses could grow slower than revenue in 2024. Is that sort of still the high-level way to think about it, or is that potentially changing a bit as investments are continuing? Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Ruth, do you want to take the second part, I’ll take the first?<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> Sure. Thanks for that, Brian. Overall, that’s sort of a truism, as you know well, that looking to grow revenues at a faster rate than expenses as we’re focused on delivering sustainable financial value, and so that really takes us to the workstreams which I tried to tick through again. Those remain the driver. They’re the real priority. Those are the efforts that are going to enable us to keep expense growth as moderated as possible while supporting the investment growth that is so exciting in front of us, in particular around AI.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>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. 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’re making sure the product works well and we are generating value for our ecosystem and that Ads transitions well.<\/p>

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.<\/p>

And I do think over time there will be newer paths, just like we’ve done on YouTube. I think with the AI work, there are subscription models as a possible path as well.<\/p>

Obviously, all of the AI investments we’re doing applies across Cloud, too, and I’m pretty optimistic about what’s ahead there as well.<\/p>

Brian Nowak (Morgan Stanley):<\/strong> Great. Thank you, both.<\/p>

Operator:<\/strong> Your next question comes from Doug Anmuth with JPMorgan. Your line is open.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Thanks for taking the questions. One for Sundar and one for Ruth.<\/p>

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] you think it could unlock and how we should think about timing.<\/p>

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? Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thanks, good questions. So on Gemini, obviously, it’s an effort from our combined Google DeepMind team. I’m very excited at the progress there and as we’re working through getting the model ready.<\/p>

To me, more importantly, we are just really laying the foundation of what I think of as the next-generation series of models we’ll be launching all throughout 2024. The pace of innovation is extraordinarily impressive to see. We are creating it from the ground up to be multimodal, highly efficient with tool and API integrations, and more importantly, laying the platform to enable future innovations as well.<\/p>

We are developing Gemini in a way that it is going to be available at various sizes and capabilities, and we’ll be using it immediately across all our products internally as well as bringing it out to both developers and Cloud customers through Vertex.<\/p>

So I view it as a journey, and each generation is going to be better than the other. And we are definitely investing, and the early results are very promising.<\/p>

On Cloud, maybe what I would say is, overall, we have definitely started seeing customers looking to optimize spend. We leaned into it to help customers, given some of the challenges they were facing, and so that was a factor.<\/p>

But we are definitely seeing a lot of interest in AI. There are many, many projects underway now. Just on Vertex alone, the number of projects grew over 7X. And so we see signs of stabilization, and I’m optimistic about what’s ahead.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Thank you, Sundar.<\/p>

Operator:<\/strong> Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thank you very much for taking the questions. Two, if I could.<\/p>

Sundar, you guys led over a year ago starting with Performance Max, and I wanted to know if we could get your updated thoughts on how AI might impact the broader advertising industry and how you are aligning Alphabet and Google’s goals with AI and where it might take the advertising industry in the years ahead. That would be the first question.<\/p>

And then about a year ago, Philipp and Ruth started talking about some of the brand advertising headwinds that YouTube was facing. As we start to lap those headwinds, how should we be thinking about a broad recovery in brand advertising versus elements of still headwinds that are being faced in the broader Ads spaces, specifically with YouTube? Thank you.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> So maybe I take the first one.<\/p>

We are very pleased with how Performance Max is performing. It gives advertisers really a maximum performance across all inventory from one really AI-powered campaign, and it’s probably the ultimate example of AI in action across our Ads products. It’s delivering excellent ROI. Those using it achieve on average over 18% more conversions at a similar cost per action.<\/p>

Since rolling it out about two years ago, we’ve continued to expand the features, give advertisers additional ways to steer how it works. We have a lot of things, like account-level negative keywords, other details here. We launched new lifecycle goals -- customer lifecycle goals, we called them. A revamped asset creation flow that really helps business adapt and scale their most successful creatives. I think that’s one to watch.<\/p>

We will also continue to build other new PMax features based on all the advertiser feedback we’re seeing. So we are very, very encouraged by the progress here.<\/p>

Overall maybe -- there was a second part to your question, a bit on what we’re hearing from the customers out there. Look, driving ROI and efficiency is still top of mind for many, right? It’s a rapidly shifting and still quite unpredictable consumer landscape out there.<\/p>

Our AI tools are very well-received. AI, gen AI are top of mind for everybody really. There’s a ton of excitement, lots of questions about it. Many understand the value. Nearly 80% of our advertisers already use at least one AI-powered Search Ads product.<\/p>

Yeah, we’re hearing a lot of good feedback on, number one, our Ads AI Essentials, which are really helping to unlock the power of AI and set up for durable ROI growth on the advertiser side. Those are products like the foundation for our data and measurement, things like Google Tag, Consent Mode and so on. Obviously Search and PMax, we talked about it, and then all those gen AI products, all those different ones. So there’s a whole lot of interest in those products.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> 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 watchtime growth and monetization.<\/p>

I would say the other thing benefiting YouTube is the retail strength we talked about with Search -- retail strength in APAC in both Search and YouTube. 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. Feel good about the results the team was able to deliver here.<\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thank you so much.<\/p>

Operator:<\/strong> Your next question comes from Lloyd Walmsley with UBS. Your line is open.<\/p>

Lloyd Walmsley (UBS):<\/strong> Great. Thanks for taking the question. Two, if I can.<\/p>

First, as we just think about the rollout of SGE across the user base, how far along is that? And how do you balance the product rollout and consumer uptake versus monetization in that transition?<\/p>

And then the second one, also sort of generative AI-related, how quickly are you guys finding new ways of optimizing? Whether that’s shrinking model sizes, chip efficiencies or anything else. And do you think overall capital intensity of business scales up, or do you just find ways to do this more efficiently as usage scales? Anything you can share there would be great. Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>The first part about SGE, we are still in 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.<\/p>

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 an AI-enhanced experience.<\/p>

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 Ads side -- to drive the right experience for users including Ads will pay dividends. I think we’ll continue to make improvements and make progress there.<\/p>

On your second question, at a high level, I would say all through the -- we just celebrated 25 years -- and of all the things I was proud about, when I looked at the strength of the work we’ve done across our infrastructure as a company, our technical infrastructure as a company, and various given stages at a given moment in time, when we adopted new generations of technology. We’ve looked at the cost of it, but then the curves, the efficiency curves we have driven on top of it, has always been phenomenal to see. And I see the current moment as no different. Already through this year, we are driving significant efficiencies, both in our models, in training costs and serving costs, and our ability to adapt what’s needed to the right use case.<\/p>

And so I think we’ll do everything that is needed to make sure we have the leading AI models and infrastructure in the world, bar none. And we will continue driving efficiencies from there.<\/p>

Lloyd Walmsley (UBS):<\/strong> Thank you.<\/p>

Operator:<\/strong> Your next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.<\/p>

Michael Nathanson (Moffett):<\/strong> Thank you. I’m going to ask you guys a multi-part question on YouTube TV. So, firstly, what were the broader objectives for getting Sunday Ticket? How did it perform versus those objectives? What lessons have you learned from having NFL Sunday Ticket? How does that affect your appetite for more sports going forward? Thanks.<\/p>

Philipp Schindler:<\/strong> So, as Sundar said earlier, we are several weeks into our first season and we are very pleased with how it’s going. I think in the broader context, you have to look at it as our overall YouTube subscription strategy.<\/p>

The great feedback we’ve gotten so far on the YouTube experience is very, very significant. People love the navigation and they love multiview. They love the chats and the polls. And frankly, people are very happy with the lack of latency here.<\/p>

The number one piece of concrete feedback the team has gotten is actually that people want the ability to pick their own games for multiview, which is -- multiview is the awesome feature we started rolling out on YouTube TV that gives fans the ability to basically watch multiple streams here at once. And, yeah, 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.<\/p>

Michael Nathanson (Moffett):<\/strong> Thank you.<\/p>

Operator:<\/strong> Your next question comes from Justin Post with Bank of America. Your line is now open.<\/p>

Justin Post (Bank of America):<\/strong> Great. Thank you, a couple questions on Q4. Can you provide any color on if there’s been any pause in advertising around the Middle East conflict in October? Anything we should be aware of for Q4?<\/p>

And then second, when we do think about the Sunday Ticket impact, I know you can’t give us revenues or expenses, but overall, would that be a headwind to margins in Q4 or something we should be thinking about? Thank you.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> So look, on the first question, obviously this is a tragic, 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.<\/p>

And then in terms of the second question, Sunday Ticket, the only thing I tried to call out there is that clearly this is the first full quarter of Sunday Ticket that is contributing overall to the subscription revenues that we see. That’s in part of Other Revenues. Also obviously, it is contributing to higher CAC in the fourth quarter. So tried to make that really clear.<\/p>

And as we look longer term, we expect to generate an attractive return over the life of the deal. We’re continuing to invest in support of this. And excited about the additional opportunities that come out of it working with partners to deliver clips and other opportunities.<\/p>

As we’ve said, we’ve heard positive feedback from our partners at the NFL about the new features and livestream reliability. And this is really a clear example of our ability to execute big partnerships with excellence at scale and really leverage a lot of the extraordinary magic at YouTube and across Google. And that’s what we’re excited about.<\/p>

Justin Post (Bank of America):<\/strong> Great, thank you.<\/p>

Operator:<\/strong> Your next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>

Ken Gawrelski (Wells Fargo):<\/strong> Thank you so much. Two questions, if I may.<\/p>

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.<\/p>

And then the second question is, any update on the Chrome cookie deprecation planned to begin in 1Q ’24? What have you seen so far based on your early testing of Privacy Sandbox, and what advertiser feedback have you received?<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>On your first question, look, you know, I broadly think of it as people are looking for information. They’ve always looked 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.<\/p>

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 at as much of that intent as possible.<\/p>

So I don’t see that changing. With mobile, there were more ways that people could get information, but we worked hard to make Search work better in the mobile world. And similarly, I view with AI, there will 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 a diverse set of needs where we are a source. So that’s how I see the opportunity ahead.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> And to the second part of your question: yes, Chrome still plans to begin phasing out third-party cookies in the second half of ’24.<\/p>

In the last several months, Chrome has really made significant progress on the Privacy Sandbox with APIs for developer testing. And they are now generally available in Chrome.<\/p>

Our Ads team is testing these APIs. And as we shared back in April, the preliminary results of our interest-based ads testing showed a combination of what we call privacy-preserving signals and AI optimization actually provides positive results for businesses preparing for a cookieless future.<\/p>

We also recently announced that in Q1 of ’24 we plan to deprecate third-party cookies for 1% of Chrome users, and this will support developers, obviously, in conducting their real-world experiments to assess the readiness and effectiveness of their products without third-party cookies.<\/p>

And we’re overall encouraged by the ecosystem engagement on Privacy Sandbox. We’ll continue to work with the industry and regulators in how these technologies can support the transition to, frankly, a more private web.<\/p>

Ken Gawrelski (Wells Fargo):<\/strong> Thank you.<\/p>

Operator:<\/strong> And our last question comes from Mark Mahaney with Evercore. Your line is now open.<\/p>

Mark Mahaney (Evercore ISI):<\/strong> Thank you. Two questions, please.<\/p>

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?<\/p>

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, why Google Cloud would have seen it maybe later than some of the other hyperscalers? Thank you.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> So I think what you’re referring to was my CapEx comment. I was trying to make the point that we are committed to meaningfully investing in CapEx, given all the opportunities we see.<\/p>

We do continue to expect elevated levels of investment in our technical infrastructure. It will be increasing in the fourth quarter. And talked about some of the difference in timing, muted timing in the third quarter due to the timing of supplier payments.<\/p>

And then tried to make it clear that we will continue to grow CapEx in 2024 -- or more specifically to your question, 2024 aggregate CapEx will be above the full year 2023. So that was the main one.<\/p>

And then as it relates to Cloud, as Sundar said, what we’re really excited about is the revenue growth does reflect healthy customer adoption across the portfolio, and that’s Infrastructure, Data Analytics, it’s Security. And so I can’t comment on others, but we feel good about where we’re sitting here and looking forward. And we’ll let you do the forecasting.<\/p>

GCP growth in the third quarter was above the growth rate for Cloud overall, and we feel really good about the work that they’re doing there. And then, of course, in addition to that is all of the contribution from Google Workspace.<\/p>

Mark Mahaney (Evercore ISI):<\/strong> Thank you.<\/p>

Operator:<\/strong> 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.<\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thanks, everyone, for joining us today. We look forward to speaking with you again on our fourth quarter 2023 call. Thank you and have a good evening.<\/p>

Operator: <\/strong>Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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Transcript<\/div>\n

For a PDF version of the transcript, please click here<\/a>.<\/p>\n

This transcript is provided for the convenience of investors only, for a full recording please see the <\/em>Q4 2023 Earnings Call webcast<\/u><\/em><\/a>. <\/em><\/p>\n

Operator:<\/strong> Welcome, everyone.<\/p>\n

Thank you for standing by for the Alphabet Fourth Quarter 2023 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. To ask a question during the session, you will need to press *1 on your telephone.<\/p>\n

I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>\n

Jim Friedland, Director Investor Relations:<\/strong> Thank you.<\/p>\n

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. Now I’ll quickly cover the Safe Harbor.<\/p>\n

Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>\n

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors discussed in our upcoming Form 10-K filing for the year ended December 31, 2023. We undertake no obligation to update any forward-looking statement.<\/p>\n

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>\n

Our comments will be on year-over-year comparisons unless we state otherwise. And now I’ll turn the call over to Sundar.<\/p>\n

Sundar Pichai, CEO Alphabet and Google:<\/strong> Hello, everyone.<\/p>\n

Our results reflect strong momentum and product innovation, continuing into 2024. Today I’m going to talk about four main topics.<\/p>\n

One, our investments in AI, including how it’s helping Search.<\/p>\n

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.<\/p>\n

Three, Cloud, which crossed $9 billion in revenues this quarter and saw accelerated growth, driven by our gen AI and product leadership.<\/p>\n

And four, our investments and focus to meet the growth opportunities ahead.<\/p>\n

First, AI and Search. As you know, we have long led the way in using AI to improve many of our products, from Search to Ads, to most of our enterprise and consumer products, helping billions of people already.<\/p>\n

Last year brought new excitement around gen AI, and I’m proud of how we responded: responsibly, with deep advances in foundation models and a number of great launches.<\/p>\n

We closed the year by launching the Gemini era, a new industry-leading series of models that will fuel the next generation of advances. Gemini is the first realization of the vision we had when we formed Google DeepMind, bringing together our two world-class research teams. It’s engineered to understand and combine text, images, audio, video, and code in a natively multimodal way, and it can run on everything from mobile devices to data centers. Gemini gives us a great foundation. It’s already demonstrating state-of-the-art capabilities, and it’s only going to get better.<\/p>\n

Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products.<\/p>\n

That starts with Search. We’re already experimenting with Gemini in Search, where it’s making our Search Generative Experience, or SGE, faster for users. We’ve seen a 40% reduction in latency in English in the US. I’m happy with what we’re seeing in the earliest days of SGE. It’s available through Search Labs in seven languages.<\/p>\n

By applying generative AI to Search, we’re able to serve a wider range of information needs and answer new types of questions, including those that benefit from multiple perspectives.<\/p>\n

People are finding it particularly useful for more complex questions, like comparisons or longer queries. It’s also helpful in areas where people are looking for deeper understanding, such as education or even gift ideas. We’re improving satisfaction, including answers for more conversational and intricate queries.<\/p>\n

As I’ve mentioned earlier, we are surfacing more links with SGE and linking to a wider range of sources on the results page, and will continue to prioritize approaches that add value for our users and send valuable traffic to publishers. Beyond SGE, we’re continuing to use AI to make searching more accessible and intuitive.<\/p>\n

Circle to Search lets you search what you see on Android phones with a simple gesture without switching apps. It’s available starting this week on Pixel 8 and Pixel 8 Pro and the new Samsung Galaxy S24 series.<\/p>\n

And Lens now offers generative AI overviews. You can add text to a visual search to ask questions about anything you see and get AI-powered insights in the moment.<\/p>\n

In addition to Search, we are also seeing a lot of interest in our AI-powered solutions for advertisers. That includes our new conversational experience that uses Gemini to accelerate the creation of search campaigns.<\/p>\n

Then there is Bard, our conversational AI tool that complements Search. It’s now powered by Gemini Pro and is much more capable at things like understanding, summarizing, reasoning, coding, and planning. It’s now in over 40 languages and over 230 countries around the world. Looking ahead, we’ll be rolling out an even more advanced version for subscribers, powered by Gemini Ultra.<\/p>\n

That’s a good segue to subscriptions. As I said earlier, it is now a $15 billion business annually. YouTube is the key driver of our subscription revenues.<\/p>\n

Available in over 100 countries and regions, YouTube Music and Premium have real momentum. They are engaging passionate users and driving great returns for the music industry and creators.<\/p>\n

YouTube TV is also doing well. We’ve had great consumer feedback on the viewing experience. People love the navigation, multiview and unlimited DVR. NFL Sunday Ticket has found its perfect home on YouTube, and Philipp will talk about that more.<\/p>\n

Let me also talk about our subscription service, Google One. It’s doing incredibly well, with strong user growth. It provides expanded storage, unlocks exclusive features in Google products and allows us to build a strong relationship with our most engaged users. Google One is growing very well, and we’re just about to cross 100 million subscribers.<\/p>\n

From here, we are going to bring in more AI features, and look forward to more strong growth to come.<\/p>\n

Next, Google Cloud.<\/p>\n

Throughout 2023, we introduced thousands of product advances, including broad gen AI capabilities across our AI infrastructure, our Vertex AI platform and our new Duet AI agents. In Q4, our product and gen AI leadership enabled us to win and expand relationships with many leading brands, including Hugging Face, McDonald’s, Motorola Mobility, and Verizon.<\/p>\n

Google Cloud offers our AI Hypercomputer, a groundbreaking, supercomputing architecture that combines our powerful TPUs and GPUs, AI software and Multislice and Multi-host technology to provide performance and cost advantages for training and serving models. Customers like Anthropic, Character.ai, Essential AI, and Mistral AI are building and serving models on it.<\/p>\n

For developers building gen AI applications, we offer Vertex AI, a comprehensive enterprise AI platform. It helps customers like Deutsche Telekom and Moody’s discover, customize, augment, and deploy over 130 gen AI models, including PaLM, Med-PaLM, Sec-PaLM and Gemini, as well as popular open source and partner models. Vertex AI has seen strong adoption with API requests increasing nearly 6X from H1 to H2 last year.<\/p>\n

Using Vertex AI, Samsung recently announced its Galaxy S24 series smartphone with Gemini and Imagen 2, our advanced text-to-image model. Shutterstock has added Imagen 2 to their AI image generator, enabling users to turn simple text prompts into unique visuals. And Victoria’s Secret & Co. will look to personalize and improve the customer experience with Gemini, Vertex AI Search and Conversations.<\/p>\n

Customers are increasingly choosing Duet AI, our packaged AI agents for Google Workspace and Google Cloud Platform, to boost productivity and improve their operations. Since its launch, thousands of companies and more than a million trusted testers have used Duet AI. It will incorporate Gemini soon.<\/p>\n

In Workspace, Duet AI is helping employees benefit from improved productivity and creativity at thousands of paying customers around the world, including Singapore Post, Uber and Woolworths.<\/p>\n

In Google Cloud Platform, Duet AI assists software developers and cybersecurity analysts. Duet AI for Developers is the only gen AI offering to support the complete development and operations lifecycle, fine-tuned with a customer’s own code corpus and policies. It is helping Wayfair, GE Appliances and Commerzbank write better software, faster with AI code completion, code generation and chat support. With Duet AI in Security Operations, we are helping cybersecurity teams at Fiserv, Spotify and Pfizer.<\/p>\n

Our robust growth has been driven by strong direct and indirect channels. With ISVs, we have nearly tripled the number of co-sell deals from 2022 to 2023. In our ecosystem, there are nearly 90,000 Google Cloud gen AI-enabled consultants, and Accenture has teamed up with Google Cloud to create a joint generative AI Center of Excellence.<\/p>\n

Next, let me turn to our focus and discipline, as we pursue the opportunities ahead.<\/p>\n

Search, YouTube and Cloud are supported by our state-of-the-art compute infrastructure. This infrastructure is also key to realizing our big AI ambitions. It’s a major differentiator for us.<\/p>\n

We continue to invest responsibly in our data centers and compute to support this new wave of growth in AI-powered services, for us and for our customers.<\/p>\n

Through this, we are being disciplined in how we run the company. You’ve heard me talk about our efforts to durably re-engineer our cost base, and to improve our velocity and efficiency. That work continues.<\/p>\n

Teams are working to focus on key priorities, and execute fast, removing layers and simplifying their organizational structures. As just one example, our Devices team has brought together different teams from across Nest, Fitbit and other teams into a new functional structure. This will help us pool resources and drive progress across our Pixel portfolio.<\/p>\n

Across different teams, we have wound down some non-priority projects, which will help us invest and operate well in our growth areas.<\/p>\n

We’re also improving our machine utilization, building on our years of experience in driving cost efficiencies in our computing infrastructure and operations.<\/p>\n

And through our supplier efficiency efforts and automation of certain processes, we’ve made major improvements in areas like procurement, achieving significant savings.<\/p>\n

That’s a snapshot of the quarter. Before I close, a couple other highlights.<\/p>\n

Pixel 8, our AI-first phone, was awarded Phone of the Year by numerous outlets. It now uses Gemini Nano, with features like Magic Compose for Google Messages and more to come.<\/p>\n

In our Other Bets portfolio of companies, Waymo, which is deeply focused on safety, reached over 1 million fully autonomous, ride-hailing trips.<\/p>\n

And Isomorphic Labs entered into strategic partnerships with Eli Lilly and Novartis to apply AI to treat diseases, which has great potential.<\/p>\n

2023 was a year of profound innovation and product momentum. Thank you to our many partners. We succeed when our partners do, and we’re grateful for the work we do together -- from our partners across the Android ecosystem, who were on display at CES; to our deep relationships with retailers, small businesses and advertising partners; to the next generation of AI startups and developers, and many more.<\/p>\n

I also want to thank all of our employees for their hard work throughout 2023 and the start of the new year. I’m excited for what’s ahead in 2024.<\/p>\n

Philipp.<\/p>\n

Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar. And hi, everyone.<\/p>\n

Google Services revenues of $76 billion were up 12% year-on-year.<\/p>\n

In Google Advertising, Search & 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.<\/p>\n

YouTube Ads revenues were up 16% year-on-year, driven by growth in both direct response and brand. And Network revenues declined 2% year-on-year.<\/p>\n

In Subscriptions, Platforms and Devices, which was previously named Google Other, year-on-year revenues increased 23%, driven by strong growth in subscriptions.<\/p>\n

Now, for some color on the quarter and where we see continued upside for long-term advertising growth.<\/p>\n

Over the last few calls, I’ve consistently highlighted how we’re putting Google AI to work for our customers to deliver profitability and help them achieve their goals in a “do more with less” environment.<\/p>\n

From a product perspective, in Q4, Performance Max remained a bright spot. We’re also excited about Demand Gen momentum. This is our big bet to help social advertisers find and convert consumers via immersive, relevant, visual creatives across YouTube, including YouTube Shorts, Gmail and Discover. In a single campaign, you get access to over 3 billion users as they stream, scroll, connect, and decide what to buy. Tens of thousands of advertisers are testing and, on average, seeing 6% more conversions per dollar versus image-only ads in Discovery campaigns.<\/p>\n

As we look ahead, we’re also starting to put generative AI in the hands of more and more businesses to help them build better campaigns and even better-performing ads.<\/p>\n

Automatically created assets help advertisers show more relevant Search ads by creating tailored headlines and descriptions based on each ad’s context. Adoption was up with strong feedback in Q4. In addition to now being available in eight languages, more advanced, gen AI-powered capabilities are coming to ACA.<\/p>\n

And then last week’s big news was that Gemini will power our new conversational experience in Google Ads. This is open in beta to US and UK advertisers. Early tests show advertisers are building higher-quality Search campaigns with less effort, especially SMBs who are 42% more likely to publish a campaign with “good” or “excellent” Ad strength. We can’t wait to see how this continues to drive performance and level the playing field for advertisers of all sizes.<\/p>\n

As we shared last quarter, Ads will continue to play an important role in the new Search experience, and we’ll continue to experiment with new formats native to SGE.<\/p>\n

SGE is creating new opportunities for us to improve commercial journeys for people by showing relevant ads alongside search results. We’ve also found that people are finding ads either above or below the AI-powered overview helpful, as they provide useful options for people to take action and connect with businesses.<\/p>\n

Looking at our strong Search performance for the fourth quarter, retail was a highlight. We continued to see a stronger start to the season, up to and including Cyber Five. In Q3, we indicated that we were seeing early trends of consumers being very price conscious, and we saw this play out in Q4. With promotional demand at an all-time high, deal-seekers using Google had access to 2X the deals in the US versus last season, as well as a better shopping experience. Launches included a one-stop-shop deals destination, new filters like “Get It Fast” and AI-generated gifting recommendations in SGE. These new features drove incremental query growth during key shopping moments like Cyber Five.<\/p>\n

Our proven AI-powered ads solutions were also a win for retailers looking to accelerate omni growth and capture holiday demand. Quick examples include a large US big-box retailer who drove a 60%+ increase in omni-ROAS and a 22%+ increase in store traffic using Performance Max during Cyber Five.<\/p>\n

A well-known global fashion brand, who drove a 15%+ higher omnichannel conversion rate versus regular shopping traffic by showcasing its store pickup offering across top markets through “pickup later” on Shopping ads.<\/p>\n

Moving on to YouTube, we’re obviously pleased with YouTube’s advertising revenue growth in Q4, and also significant growth in our subscription revenues.<\/p>\n

I’ll reiterate what I’ve said before. YouTube’s success starts with creator success. We give millions of creators more ways to create content and connect with fans; and more ways to make money and build their own businesses than any other platform.<\/p>\n

More creators means more content, which leads to more viewers. And via ads and subscriptions, these viewers fund our creators and drive the eyeballs and engagement our advertisers want. To keep this momentum going, we’re focused on delivering value across four pillars: creation, viewers, monetization, and responsibility.<\/p>\n

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 livestreams with a production studio in the palm of their hands.<\/p>\n

Gen AI is supercharging these capabilities. Anyone with a phone can swap in a new backdrop, remove background extras, translate their video into dozens of languages, all without a big studio budget. We’re excited about our first products in this area, from Dream Screen for AI-generated backgrounds to Aloud for AI-powered dubbing. There’s more to come.<\/p>\n

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+ logged-in users every month, and we’re averaging 70 billion in daily views.<\/p>\n

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 a 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.<\/p>\n

Monetization is pillar number three and realized through a combination of ads-supported and subscription offerings. Advertising generates the bulk of our revenue, and we continue to invest heavily here.<\/p>\n

We’ve rolled out CTV-first formats, like 30-second non-skippable ads and Pause experiences; as well as an industry-first, send-to-phone experience that lets people use a second screen to engage with ads.<\/p>\n

For Shorts, we’ve developed new formats that are less interruptive to viewers. It’s early, we’re learning, but excited by the opportunities for ads this can unlock. Shorts monetization continues to progress nicely.<\/p>\n

Our AI-powered video formats, from Video Reach and Video View Campaigns to Demand Gen and Video Action, continue to make advertiser dollars go further and drive results across the funnel.<\/p>\n

We’re also introducing new and existing advertisers to YouTube via sports content. 90+ upfront and scatter advertisers, including Unilever, are partnering with YouTube in our first year across NFL Sunday Ticket in-game advertising opportunities.<\/p>\n

Our subscription offerings are also growing at a healthy clip. YouTube Music and Premium performed well. Premium users are delivering more value to our partners and YouTube than even ad-supported users do. On average, each additional Premium sign-up boosts earnings for creators, music and media partners, and YouTube itself. And we’ve made Premium even more attractive with new features, bundles and other enhancements.<\/p>\n

We’re also pleased with our first season of NFL Sunday Ticket. It gave creators new opportunities to create content and feed user engagement across traditional user content and professional sports content. Feedback on the user experience, including multiview, has been great. We’re excited to continue to innovate here.<\/p>\n

Responsibility is our fourth pillar, and it underlies everything we do across YouTube. We’ll continue to focus relentlessly on this.<\/p>\n

As always, deepening our relationships with key partners to bring them the best of Google is a key priority for us. And we continued to do this across industries in Q4. We just talked about the NFL. Sundar mentioned Samsung, among others, earlier.<\/p>\n

Another highlight was our expanded partnership with Porsche to enhance customers’ digital experiences with a deeper in-vehicle integration of Google built-in services, including Google Maps and Play.<\/p>\n

Whether it’s continued collaboration with our partners and key ecosystems, or putting Google AI to work for more customers, I’m excited about the opportunities for continued impact in 2024.<\/p>\n

I’ll wrap with a huge note of gratitude to our customers and partners. Our success is only possible because of their success. And then to our Googlers for their outstanding work and focus this year.<\/p>\n

Ruth, over to you.<\/p>\n

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> Thank you, Philipp.<\/p>\n

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.<\/p>\n

Search remained the largest contributor to revenue growth.<\/p>\n

My comments will be on year-over-year comparisons for the fourth quarter, unless I state otherwise.<\/p>\n

Total Cost of Revenues was $37.6 billion, up 6%.<\/p>\n

Other Cost of Revenues was $23.6 billion, up 5%, with the increase driven primarily by content acquisition costs associated with YouTube subscription offerings.<\/p>\n

The growth rate also reflects the offsetting benefit of lapping $1.2 billion in inventory-related charges that we called out in the fourth quarter last year, as well as a reduction in depreciation expense due to changes in estimated useful lives we made starting in the first quarter of 2023.<\/p>\n

In terms of total expenses, the year-on-year comparisons reflect an additional $1.2 billion in exit charges that we took in the fourth quarter of 2023 in connection with actions to optimize our global office space. As you can see in our earnings release, these charges were allocated across the expense lines in Other Cost of Revenues and OpEx based on associated headcount.<\/p>\n

Operating expenses were $25 billion, up 11%, primarily reflecting an increase in R&D expenses which were driven by the real estate charges, followed by compensation.<\/p>\n

Operating income was $23.7 billion, up 30%, and our operating margin was 27%.<\/p>\n

Net income was $20.7 billion, and EPS was $1.64.<\/p>\n

We delivered Free Cash Flow of $7.9 billion, which was affected by the timing of the $10.5 billion tax payment we made on October 16 that we called out previously, related to the deferral of certain tax payments to the fourth quarter.<\/p>\n

For the full year 2023, Free Cash Flow was $69 billion.<\/p>\n

We repurchased a total of $62 billion of our Class A and Class C shares in 2023 and ended the year with $111 billion in cash and marketable securities.<\/p>\n

Turning to segment results, within Google Services, Revenues were $76.3 billion, up 12%.<\/p>\n

Google Search and Other advertising revenues of $48 billion in the quarter were up 13%, led again by growth in retail.<\/p>\n

YouTube advertising revenues of $9.2 billion, were up 16% driven by both direct response and brand advertising.<\/p>\n

Network advertising revenues of $8.3 billion were down 2%.<\/p>\n

Subscriptions, Platforms and Devices revenues, which we previously referred to as Other Revenues, were $10.8 billion up 23%, primarily reflecting growth in YouTube subscription revenues.<\/p>\n

TAC was $14 billion, up 8%.<\/p>\n

Google Services Operating Income was $26.7 billion, up 32%, and the operating margin was 35%.<\/p>\n

Turning to the Google Cloud segment, revenues were $9.2 billion for the quarter, up 26%.<\/p>\n

We’re very pleased with the momentum of GCP, with an increasing contribution from AI.<\/p>\n

Google Workspace also delivered strong revenue growth, primarily driven by increases in average revenue per seat.<\/p>\n

Google Cloud delivered Operating Income of $864 million, and an operating margin of 9%.<\/p>\n

As to our Other Bets, for the full year 2023, revenues were $1.5 billion and the operating loss was $4.1 billion. Results in the fourth quarter benefitted from a milestone payment in one of the Other Bets.<\/p>\n

Turning to our outlook for the business, with respect to Google Services, first, within Advertising, we were pleased with the sequential revenue growth of Search and YouTube advertising throughout 2023, which reflects the extraordinary work across our teams to drive improved experiences for users and attractive ROI for advertisers.<\/p>\n

As we enter 2024 with advertising revenues of more than $100 billion higher than 2019, we remain focused on sustaining healthy growth on this larger base.<\/p>\n

Second, within Subscriptions, Platforms and Devices, our total revenues from Subscription products reached $15 billion for the full year 2023, driven primarily by substantial growth in subscribers for our YouTube subscription offerings.<\/p>\n

The substantial increase in our subscription revenues over the past few years demonstrates the ability of our teams to deliver high value-add offerings and provides a strong base on which to build, including through YouTube and newer services like Google One.<\/p>\n

Play had solid growth again in the fourth quarter, driven primarily by an increase in the number of buyers.<\/p>\n

In Devices, we continue to make sizable investments, with increased emphasis on our Pixel family, particularly with AI-powered innovation, while driving further efficiencies across the portfolio.<\/p>\n

Turning to Google Cloud, we are pleased with operating performance in the year. Full year revenues of $33 billion were up 26% versus prior year, ending with strong Q4 performance.<\/p>\n

The Cloud team is intensely focused on bringing the benefits of Gemini -- our industry-leading AI technology -- to enterprises and governments globally, and we are gratified with the level of engagement.<\/p>\n

The strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area.<\/p>\n

In terms of profitability, the improvement in 2023 reflects sustained focus across the team with the intent to maintain healthy profitability while we continue to invest to support long-term growth.<\/p>\n

Turning to margins and expenses, as we have repeatedly stressed, we remain committed to our framework to durably re-engineer our cost base as we invest to support our growth priorities.<\/p>\n

Key contributors to moderating our expense growth include, first, product and process prioritization to ensure we have the right resources behind our most important opportunities and to reallocate resources where we can.<\/p>\n

Second, organizational efficiency and structure. We’re focused on removing layers to simplify execution and drive velocity.<\/p>\n

Both product prioritization and the organization design efforts result in a slower pace of hiring as you can see with our headcount down year-on-year, reflecting the reductions we announced in the first quarter of 2023 and a much slower pace of hiring. We will continue to invest in top technical and engineering talent.<\/p>\n

Finally, we continue to execute the other workstreams to slow expense growth, including improving efficiency in our technical infrastructure; streamlining operations across Alphabet through the use of AI; increasing efficiency of our spend with suppliers and vendors through our central procurement organization and optimizing our real estate portfolio.<\/p>\n

With respect to CapEx, our reported CapEx in the fourth quarter was $11 billion, driven overwhelmingly by investment in our technical infrastructure, with the largest component for servers, followed by data centers.<\/p>\n

The step up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, Cloud enterprise customers, and governments globally and the long-term growth opportunities that offers.<\/p>\n

In 2024, we expect investment in CapEx will be notably larger than in 2023.<\/p>\n

With regard to Other Bets, we’ve been working to sharpen our investment focus while capturing the upside given compelling technology breakthroughs across the portfolio.<\/p>\n

For example, last week, Alphabet’s X announced that it would be moving to spin out more projects as independent companies through external capital, giving X the opportunity to bring more focus to the breakthrough technologies it is working on to address some of the world’s most pressing challenges.<\/p>\n

Thank you. Sundar, Philipp and I will now take your questions.<\/p>\n

Operator:<\/strong> Thank you. As a reminder, to ask a question you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated. And our first question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>\n

Brian Nowak (Morgan Stanley):<\/strong> Great, thanks for taking my questions. I have two for Philipp.<\/p>\n

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 have been talking about some of the early momentum with tens of thousands of advertisers.<\/p>\n

The question is: Can you sort of walk us through some of the hurdles and gating factors that we should be thinking through that dictate the pace at which these tools can really be rolled out broadly, just so we and advertisers can get an understanding for when they could have a bigger impact on the whole business?<\/p>\n

And then secondly, how do you think about the long-term sales force intensity of the advertising business as you roll more AI-based tools like PMax impacting the overall ad allocation? Thanks.<\/p>\n

Philipp Schindler, SVP and CBO, Google:<\/strong> Thank you so much.<\/p>\n

So I have 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: Bidding, targeting, creative, as well as our core advertiser and publisher experiences.<\/p>\n

We are seeing in core Search ads, for example, the bidding side, the value-based bidding, as a very significant one on the targeting side, the broad match on creatives, responsive search ads, automatically created ads assets. And we are very happy with the progress we’re seeing in those areas.<\/p>\n

I think I mentioned in one of the previous calls that, one, you asked about hurdles and gating factors, the AI Essentials play a huge role in this, trying to get everybody ready to really take full advantage of those tools. We talked about the progress on PMax as well that we were very happy with in Q4. So overall, I think we are on track with what we’re expecting here.<\/p>\n

On the sales force intensity side, we have done a few reallocations, or let me call it portfolio adjustments. As you know, we have two large different teams. One is our LCS, Large Customer Solutions team, that’s really focused on transformational growth for our largest and most sophisticated customers. And we have our -- we call them GCS, Global Customer Solutions team, which is the channel where really every customer starts, from some of our largest customers now to also the millions of smaller ones and SMBs.<\/p>\n

The GCS is really then scaling growth by dynamically delivering really the right treatment for every customer. And important to note, it’s also our fastest-growing channel and it delivered particularly strong growth in Q4. So we have done adjustments here to focus more resources on the GCS side.<\/p>\n

But I also want to be clear, when we restructure, there’s always an opportunity to be more efficient and smarter in how we service and grow our customers. We’re not restructuring because AI is taking away roles, that’s important here. But we see significant opportunities here with our AI-powered solution to actually deliver incredible ROI at scale. And that’s why we’re doing some of those adjustments.<\/p>\n

So I look at sales force intensity as a stronger focus going forward on the channels I mentioned here.<\/p>\n

Brian Nowak (Morgan Stanley):<\/strong> Great. Thanks, Philipp.<\/p>\n

Operator:<\/strong> Our next question comes from Doug Anmuth with JPMorgan. Your line is now open.<\/p>\n

Doug Anmuth (JPMorgan):<\/strong> Thanks for taking the questions. One for Ruth and one for Philipp.<\/p>\n

Ruth, you’re now into year two of durably re-engineering the cost structure. Can you just help us assess your progress so far, and are there any guideposts that we should be thinking about going forward?<\/p>\n

And then, Philipp, can you talk more about NFL Sunday Ticket and just what your key learnings were in year one? How are you thinking about the returns on the investment on both from an advertising perspective and then also subscribers to both Sunday Ticket and YouTube TV? Thanks.<\/p>\n

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> Thanks for the question. So we are very pleased with the progress we’re continuing to make. And we are very committed to the framework to durably re-engineer our cost base really as we are investing to support the growth priorities.<\/p>\n

I tried to call out a number of them in opening comments. But really, as you’re looking at the work being done across Google, across Alphabet, it does start with product and process prioritization to make sure we’ve got the right resources behind the most important opportunities, and then that creates the opportunity for reallocating resources where we can.<\/p>\n

Then we talked a lot this quarter about organizational efficiency and structure, and we’re focused on removing layers to simplify execution and drive velocity.<\/p>\n

The combination of those two, product prioritization and organizational design work, has resulted in the slower pace of hiring. You can see that in our headcount numbers down year-on-year. You can see it in some of the results that we delivered in the fourth quarter. And it also goes to the announcements around first quarter and much slower pace of hiring.<\/p>\n

At this point in the quarter, we do estimate that severance-related expense will be roughly $700 million in the first quarter as we’ve continued these efforts. But as I said in opening comments, we will continue to invest in top engineering.<\/p>\n

So that’s sort of the big one if you start with product prioritization and organizational design, which is why I also made the note about the severance-related expense, which helps pave the way as we’re continuing to do the work that we’re doing.<\/p>\n

But then we have a host of other workstreams which I talked about, everything with improving efficiency in our technical infrastructure which is a very large, ongoing effort, streamlining operations across Alphabet through use of AI. All the work we’re doing with our suppliers and vendors, the work we’re doing optimizing our real estate portfolio. So when we’ve described durably re-engineering, it’s about continuing to build on work that started and that is ongoing.<\/p>\n

Philipp Schindler, SVP and CBO, Google:<\/strong> So on the NFL Sunday Ticket side, look, as I said earlier, NFL Sunday Ticket supports our long-term strategy and really helps solidify YouTube’s position as a must-have app on everyone’s TV set.<\/p>\n

You asked about some of the learnings. Maybe I start with the viewing experience. We received great feedback so far. People like the navigation, multiview, the chat, the lack of latency. Really, really positive feedback on this one.<\/p>\n

You asked about the ads and the subs. Maybe I start with the subscribers. We’re pleased with the NFL Sunday Ticket signups in our first season, both as part of the YouTube TV bundle and as a stand-alone offering on YouTube Primetime Channels. Remember, you can access them via both. Nothing more to share on the subs side today on this one.<\/p>\n

On the ads side, as you know, advertisers can buy from an NFL lineup as part of our YouTube Select portfolio. And this actually allows advertisers to reach football fans across YouTube’s pretty unique breadth of NFL content, independently of whether you are viewing live NFL games or on YouTube TV or Primetime Channels or watching NFL highlights or postgame commentary on YouTube channels.<\/p>\n

And we saw solid demand across the ad market around our YouTube Sunday Ticket offering here. We’re excited about the partnership ahead -- or the partnerships ahead. This is our first season. And I mentioned over 90 upfront and scatter advertisers partnered with YouTube in our first year across NFL Sunday Ticket in-game opportunities, which we really appreciate.<\/p>\n

Doug Anmuth (JPMorgan):<\/strong> Thank you, both.<\/p>\n

Operator:<\/strong> Our next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>\n

Eric Sheridan (Goldman Sachs):<\/strong> Thank you for taking the questions. Two if I could.<\/p>\n

Sundar, a bigger-picture question coming back to your comments early in the call on Search Generative Experience. When you think about the evolution of product over the next couple of years, how do you envision more traditional Search and things like the Google Assistant continuing to evolve in a world of Search Generative Experience and Bard and what that might mean for elements of commercial and non-commercial Search and how use cases might change in the years ahead?<\/p>\n

And then, Ruth, I just want to make sure we understood some of the messaging from the release and the public comments around one-timers in the quarter itself. It seems as if they were not allocated to the segments but are more elements of Other Bets and Alphabet-level activities. I just wanted to confirm where elements of those one-timers were captured in the P&L statement, and whether there were also any elements of legal one-timers that would be called out this quarter as well. Thank you.<\/p>\n

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Eric. Great question.<\/p>\n

Look, it is an exciting time. Clearly, as I said, as we are incorporating SGE in the product, early feedback is positive. And we’ve been iterating on it, and it clearly works for a certain type of queries very well. We are expanding the set of queries where it works very well.<\/p>\n

It definitely is answering a certain category of queries for the first time in a better way. So that gives us direction to proceed as well.<\/p>\n

Overall, one of the things I think people underestimate about Search is the breadth of Search, the amount of queries we see constantly on a new day which we haven’t seen before. And so the trick here is to deliver that high-quality experience across the breadth of what we see in Search.<\/p>\n

And over time, we think Assistant will be very complementary. And we will again use generative AI there, particularly with our most advanced models in Bard. And allows us to act more like an agent over time, if I were to think about the future, and maybe, you know, go beyond answers and follow through for users even more.<\/p>\n

So that is directionally what the opportunity set is, obviously a lot of execution ahead. But it’s an area where I think we have a deep sense of what to do. And all the work we have taken so far, the feedback has been super positive.<\/p>\n

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> And then in terms of your other question. So on the real estate charge, the $1.2 billion in exit charges related to real estate, that is in Alphabet-level activities.<\/p>\n

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.<\/p>\n

Operator:<\/strong> Our next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.<\/p>\n

Michael Nathanson (Moffett):<\/strong> Thanks. I have two for Philipp, I think. Given the importance of Connected TV engagement at YouTube, can you talk about the opportunity outside the US for Connected TV and what the company is doing at-large to drive more adoption of YouTube or Connected TVs, even the Google operating systems? Anything you can talk about outside the US?<\/p>\n

And then you have been consistent about the strength of Shorts over the past year. Can you talk a bit about the monetization challenges? Do you still see the headwinds that you saw at the beginning? Anything you can share about the density of the auction or advertising interest on Shorts? So help us with whether or not that’s still a headwind to growth. Thanks so much.<\/p>\n

Philipp Schindler, SVP and CBO, Google:<\/strong> Thank you so much for your question.<\/p>\n

On the Connected TV side, I mentioned actually it continues to perform really well. I said before, YouTube is the leader in US 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.<\/p>\n

On the Shorts monetization side, look, we built Shorts to respond to the huge demand from both creators and viewers for short-form video, and we are very pleased with the growth we’ve seen. I mentioned 2 billion+ logged-in users every month, 70 billion in daily views.<\/p>\n

Specifically to the monetization question, Shorts monetization continues to progress nicely. In fact, actually since we introduced revenue sharing for Shorts, the total creator earnings generated from Shorts have increased every month, and we expect this to continue. And similar obviously to our long-form videos, we are really committed here to long-term partnership. You heard me say this before: when creators succeed, we succeed.<\/p>\n

Michael Nathanson (Moffett):<\/strong> Thanks, Philipp.<\/p>\n

Operator:<\/strong> Our next question comes from Stephen Ju with UBS. Your line is now open.<\/p>\n

Stephen Ju (UBS):<\/strong> Thank you so much. Philipp, this is not a new question. It’s also been about two years since PMax was launched, but it seems like there has been this long lineage of product development and rollout of things like Smart Bidding in your history, which I believe at the time was designed to help smaller advertisers more easily run Search advertising.<\/p>\n

And today, you are helping generate creatives as well as manage my spend and maximize ROI across multiple Google surfaces. So how are you feeling about enabling SMBs who otherwise could not advertise with you before? And what kind of TAM expansion tailwind does that create for your revenue growth over the longer term? Thanks.<\/p>\n

Philipp Schindler, SVP and CBO, Google:<\/strong> Look, as you know, SMBs are a huge focus for us. We mentioned this several times before. They’re part of our GCS channel. Not only -- there’s more on this, but they’ve been under a ton of change over the last few years. And our focus has always been here on investing in solutions that really help level the playing field, and you mentioned several of those.<\/p>\n

So actually SMBs can compete with bigger brands and more sophisticated advertisers. The feedback we are always getting is they need easy solutions that could drive value quickly and several of the AI-powered solutions that you are mentioning are actually making the workflow and the whole on-ramp and bidded targeted creative and so on you mentioned so much easier for SMBs.<\/p>\n

So we’re very satisfied with what we are seeing here. We will continue to invest. And I feel AI is really a helpful, very interesting future path to make life not only easier but also much more productive and better ROIs over time, more level playing field for SMBs.<\/p>\n

Stephen Ju (UBS):<\/strong> Thank you.<\/p>\n

Operator:<\/strong> Our next question comes from Justin Post with BAML. Your line is now open.<\/p>\n

Justin Post (BAML):<\/strong> Great. Maybe one for Sundar and one for Ruth.<\/p>\n

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 have seen any changes in query volumes, positive or negative, since you’ve seen the year evolve in more Search Generative Experiences? And what can really make Google stand out versus other AI tools?<\/p>\n

And then, Ruth, CapEx was $11 billion, a step up, obviously. Any one-time items in there or is that how we should think about the new run rate into ’24? Thank you.<\/p>\n

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Justin. First of all, look, we think about effects on Search obviously more broadly. People have a lot of information choices, 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.<\/p>\n

Obviously generative AI is a new tool in the arsenal, but there’s a lot more that goes into Search -- the breadth, the depth, the diversity across verticals, the ability to follow through, getting actually access to rich, diverse sources of content on the Web and putting it all together in a compelling way.<\/p>\n

And I think through the year, too, when we test, we test Search Generative Experience particularly against everything that’s out there. And we can see the progress we are making and how much users are liking the experience better.<\/p>\n

And so I think -- feel very good about the progress. And our roadmap for ’24 is strong, both on the Search and underlying AI progress, including the models. So I’m pretty excited about what’s ahead of us in ’24.<\/p>\n

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> And with respect to CapEx, the CapEx of $11 billion in the fourth quarter, as I indicated, was overwhelmingly investment in our technical infrastructure. To your question, there was no one-time item in there. And it really reflects -- is our outlook for everything Sundar and Philipp and I have been talking about, the extraordinary applications of AI within Google DeepMind, Google Services, Google Cloud. It’s across the board for users, for advertisers, developers, Cloud Enterprise customers, governments. And it’s really the long-term opportunity that offers.<\/p>\n

So last quarter, we did note that CapEx would continue to grow in 2024. We do expect 2024 full-year CapEx to be notably larger than 2023. As a note, I think you all know this, but timing of cash payments can affect the quarterly CapEx number. But the main point is we are continuing to invest.<\/p>\n

Operator:<\/strong> Our next question comes from Ross Sandler with Barclays. Your line is now open.<\/p>\n

Ross Sandler (Barclays):<\/strong> Great, thanks. So I guess 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 leaning on Ad Quality team to deliver 20% RPM growth in Search is a fragile strategy. Dating back to 2019, your business has, I think, more than doubled since then.<\/p>\n

I guess as we sit here today in early 2024, how do you feel about Google’s ability to drive Search RPM going forward? And I guess in the context of what Ruth said tonight about the large revenue base, just how do you feel about the monetization? Thank you.<\/p>\n

Sundar Pichai, CEO Alphabet and Google:<\/strong> 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 the ads RPM, all - two 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? So the fundamental attributes don’t change.<\/p>\n

I think AI gives us opportunity both on the organic side as well as on the monetization side, and I think we are in the early days of it. I think we will be able to, taking a long-term view, serve information needs in a deeper way. And so I think about it with that long-term context, and I’m pretty excited about what’s ahead.<\/p>\n

Operator:<\/strong> And our last question will be from Mark Mahaney with Evercore. Your line is now open.<\/p>\n

Mark Mahaney (Evercore):<\/strong> Okay, thanks. One question on YouTube AI and one on Cloud.<\/p>\n

On Cloud first, there’s just this volatility, this material deceleration last quarter, and then nice re-acceleration this quarter. Is that explained by where we are in the optimization cycle and then maybe generative AI workloads starting to trickle in now and cause that growth curve to bend back up? Any commentary just on the sort of the volatility, the deceleration and the re-acceleration that we have seen?<\/p>\n

And then, Philipp, I wanted to ask on the creative side, and particularly on YouTube and ads and using AI to improve the creative and really to offer SMBs who have been with Google forever, but offer them now performance-based video ad campaigns created by AI, is that kind of a new growth area? How far along are you in terms of offering this out into the market? And do you think that this opens up a new area of spend that wasn’t there before? Thank you.<\/p>\n

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Mark. On Cloud, let me take that. First of all, a combination of factors, I think. I think definitely excitement around the AI solutions on top of our foundational pillar, be it data analytics, infrastructure, security, et cetera. But AI is definitely something which is driving interest and early adoption. And as you saw, that greater than 70% of gen AI unicorns are using Google Cloud.<\/p>\n

And so I think it’s an area where our strengths will continue to play out as we go through ’24, especially when I look at the innovation ahead from us on the AI front.<\/p>\n

And, second, I think there are regional variations, but the cost optimizations in many parts are something we have mostly worked through, and I think they are also a contributing factor as well.<\/p>\n

Philipp Schindler, SVP and CBO, Google:<\/strong> 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.<\/p>\n

You obviously are aware of the Made on YouTube announcement where we introduced a whole lot of new complementary creativity features on YouTube, including Dream Screen, for example, and a lot of other really interesting tools and thoughts.<\/p>\n

You can obviously imagine that we can take this more actively to the advertising world already. As you know, it continues already to power AI, a lot of our video ad solutions and measurement capabilities. It’s part of video reach campaigns, multi-format ads are - actually, there’s generative creator music that actually makes it easier for creators to design the perfect soundtrack already. And as I said earlier, AI will unlock a new world of creativity.<\/p>\n

And you can see how this will -- if you just look at where models are heading, where multimodal models are heading, where the generation capabilities of those models are heading, you can absolutely see how this will impact and positively impact and simplify the flow for creators, similar to what you see already emerging in some of our core products like ACA on the Search side.<\/p>\n

Mark Mahaney (Evercore):<\/strong> Thank you.<\/p>\n

Operator:<\/strong> 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.<\/p>\n

Jim Friedland, Director Investor Relations:<\/strong> 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.<\/p>\n

Operator:<\/strong> Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.<\/p>\n<\/div>","DocumentFileSize":null,"DocumentFileType":null,"DocumentPath":null,"EventId":1062,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"58eec50d-a73e-4e55-9f6c-b2ab03ab798f","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2024\/2023-Q4-Earnings-Call\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"ad612276-1148-4d2c-a805-c59e6d6262af","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"Q4","ReportYear":"2023","RevisionNumber":45190,"SeoName":"2023-Q4-Earnings-Call","TagsList":null,"TimeZone":"PT","Title":"2023 Q4 Earnings Call","WebCastLink":"","WorkflowId":"b07a2078-2cb6-434b-99c4-af3c94616522","EndDate":"01\/30\/2024 14:30:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"01\/30\/2024 13:30:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"2024 Q1 Earnings Call","Type":"Video","Url":"https:\/\/www.youtube.com\/embed\/A2O2f5dlzcE?enablejsapi=1"}],"Body":"

Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/p>

This transcript is provided for the convenience of investors only, for a full recording please see the <\/i>Q1 2024 Earnings Call webcast<\/u><\/i><\/a>. <\/i><\/p>

Operator:<\/strong> Welcome, everyone.<\/p>

Thank you for standing by for the Alphabet First 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. To ask a question during the session, you will need to press *1 on your telephone. I would now like to hand the conference over to your speaker today Jim Friedland, Director of Investor Relations. Please, go ahead.<\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thank you.<\/p>

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. Now I’ll quickly cover the Safe Harbor.<\/p>

Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement.<\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>

Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>

And now, I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thank you, Jim. And hello, everyone.<\/p>

It was a great quarter, led by strong performance from Search, YouTube and Cloud.<\/p>

Today, I want to share how we’re thinking about the business and the opportunity more broadly. Of course, that’s heavily focused on AI and Search. Then I’ll take you through some highlights from the quarter in Cloud, YouTube and beyond.<\/p>

Let’s discuss our momentum and strategy. Taking a step back, it took Google more than 15 years to reach $100 billion in annual revenue. In just the last six years, we’ve gone from $100 billion to more than $300 billion in annual revenue.<\/p>

Of course, Search continues to power that, as you see in our Q1 results. But in addition, we expect YouTube overall and Cloud to exit 2024 at a combined annual run rate of over $100 billion. This shows our track record of investing in and building successful, new, growing businesses.<\/p>

Now, let’s look at how well we are positioned for the next wave of AI innovation and the opportunity ahead. There are six points to make.<\/p>

One, research leadership; two, infrastructure leadership; three, innovation in Search; four, our global product footprint; five, velocity and execution; six, monetization paths.<\/p>

First, our foundation of research leadership. We’ve been an AI-first company since 2016, pioneering many of the modern breakthroughs that power AI progress, for us and for the industry. Last week, we further consolidated teams that build AI models under Google DeepMind.<\/p>

This will help simplify development and establish a single access point for our product teams as they build generative AI applications with these models. The teams are making rapid progress developing Gemini and other models.<\/p>

In February, we rolled out Gemini 1.5 Pro, which shows dramatic performance enhancements across a number of dimensions. It includes a breakthrough in long-context understanding, achieving the longest context window of any large-scale foundation model yet. Combining this with Gemini’s native multimodal understanding across audio, video, text, code and more -- it’s highly capable.<\/p>

We are already seeing developers and enterprise customers enthusiastically embrace Gemini 1.5 and use it for a wide range of things.<\/p>

Beyond Gemini, we’ve built other useful models, including our Gemma open models, as well as Imagen visual models and others.<\/p>

Second, infrastructure leadership. We have the best infrastructure for the AI era. Building world-leading infrastructure is in our DNA, starting in our earliest days when we had to design purpose-built hardware to power Search.<\/p>

Our data centers are some of the most high-performing, secure, reliable and efficient in the world. They’ve been purpose-built for training cutting-edge AI models and designed to achieve unprecedented improvements in efficiency.<\/p>

We have developed new AI models and algorithms that are more than 100 times more efficient than they were 18 months ago.<\/p>

Our custom TPUs, now in their fifth generation, are powering the next generation of ambitious AI projects. Gemini was trained on and is served using TPUs.<\/p>

We are committed to making the investments required to keep us at the leading edge in technical infrastructure. You can see that from the increases in our capital expenditures.<\/p>

This will fuel growth in Cloud, help us push the frontiers of AI models, and enable innovation across our services, especially in Search.<\/p>

AI innovations in Search are the third and perhaps the most important point I want to make.<\/p>

We have been through technology shifts before -- to the web, to mobile and even to voice technology. Each shift expanded what people can do with Search and led to new growth. We are seeing a similar shift happening now with generative AI.<\/p>

For nearly a year, we’ve been experimenting with SGE in Search Labs across a wide range of queries. And now, we’re starting to bring AI overviews to the main search results page.<\/p>

We are being measured in how we do this, focusing on areas where gen AI can improve the Search experience, while also prioritizing traffic to websites and merchants.<\/p>

We have already served billions of queries with our generative AI features. It’s enabling people to access new information, to ask questions in new ways, and to ask more complex questions.<\/p>

Most notably, based on our testing, we are encouraged that we are seeing an increase in Search usage among people who use the new AI overviews, as well as increased user satisfaction with the results.<\/p>

And with Circle to Search, people can now circle what they see on their Android screens, ask a question about an image or object in a video, and get an AI overview with Lens.<\/p>

Fourth, our global product footprint beyond Search. We have six products with more than two billion monthly users, including three billion Android devices. Fifteen products have half a billion users. And we operate across 100-plus countries.<\/p>

This gives us a lot of opportunities to bring helpful gen AI features and multimodal capabilities to people everywhere and improve their experiences.<\/p>

We’ve brought many new AI features to Pixel, Photos, Chrome, Messages and more.<\/p>

We are also pleased with the progress we’re seeing with Gemini and Gemini Advanced through the Gemini app on Android and the Google App on iOS.<\/p>

Fifth, improved velocity and execution. We’ve been really focused on simplifying our structures to help us move faster.<\/p>

In addition to bringing together our model building teams under Google DeepMind, we recently unified our ML infrastructure and ML developer teams to enable faster decisions, smarter compute allocation, and a better customer experience.<\/p>

Earlier this year we brought our Search teams together under one leader. And last week, we took another step, bringing together our Platforms and Devices teams.<\/p>

The new combined team will focus on delivering high-quality products and experiences, bolstering the Android and Chrome ecosystems and bringing our best innovations to partners, faster.<\/p>

We also remain focused on long-term efforts to durably reengineer our cost base. You can see the impact of this work reflected in our operating margin improvement.<\/p>

We continue to manage our headcount growth and align teams with our highest priority areas. This speeds up decision-making, reduces layers and enables us to invest in the right areas.<\/p>

Beyond our teams, we’re very focused on our cost structures, procurement and efficiency. And a number of technical breakthroughs are enhancing machine speed and efficiency, including the new family of Gemini models and a new generation of TPUs.<\/p>

For example, since introducing SGE about a year ago, machine costs associated with SGE responses have decreased 80% from when first introduced in Labs, driven by hardware, engineering and technical breakthroughs.<\/p>

We remain committed to all of this work.<\/p>

Finally, our monetization path. We have clear paths to AI monetization through Ads and Cloud, as well as subscriptions.<\/p>

Philipp will talk more about new AI features that are helping advertisers, including bringing Gemini models into Performance Max.<\/p>

Our Cloud business continues to grow, as we bring the best of Google AI to enterprise customers and organizations around the world.<\/p>

And Google One now has crossed 100 million paid subscribers. And in Q1, we introduced a new AI Premium plan with Gemini Advanced.<\/p>

Okay, those are the six points. So now let me turn to quarterly highlights from Cloud and YouTube in a bit more detail.<\/p>

In Cloud, we have announced more than 1,000 new products and features over the past eight months.<\/p>

At Google Cloud Next, more than 300 customers and partners spoke about their generative AI successes with Google Cloud, including global brands like Bayer, Cintas, Mercedes-Benz, Walmart and many more.<\/p>

Our differentiation in Cloud begins with our AI Hypercomputer, which provides efficient and cost-effective infrastructure to train and serve models.<\/p>

Today, more than 60% of funded gen AI startups and nearly 90% of gen AI unicorns are Google Cloud customers. And customers like PayPal and Kakao Brain are choosing our infrastructure.<\/p>

We offer an industry-leading portfolio of NVIDIA GPUs along with our TPUs. This includes TPUv5p, which is now generally available, and NVIDIA’s latest generation of Blackwell GPUs.<\/p>

We also announced Axion, our new Google-designed and ARM-based CPU. In benchmark testing, it has performed up to 50% better than comparable x86-based systems.<\/p>

On top of our infrastructure, we offer more than 130 models, including our own models, open source models and third-party models. We made Gemini 1.5 Pro available to customers, as well as Imagen 2.0 at Cloud Next.<\/p>

And we shared that more than one million developers are now using our generative AI across tools including AI Studio and Vertex AI.<\/p>

We spoke about how customers like Bristol Myers Squibb and Etsy can quickly and easily build agents and connect them to their existing systems.<\/p>

For example, Discover Financial has begun deploying gen AI-driven tools to its nearly 10,000 call center agents to achieve faster resolution times for customers.<\/p>

Customers can now also ground their gen AI with Google Search and their own data from their enterprise databases and applications.<\/p>

In Workspace, we announced that organizations like Uber, Pepperdine University and Pennymac are using Gemini in Google Workspace, our AI-powered agent that’s built right into Gmail, Docs, Sheets and more.<\/p>

We also announced Google Vids, a new application to create stories in short-video format.<\/p>

And we introduced Gemini for Meetings and Messaging and Gemini Security for Workspace.<\/p>

Customers are choosing Workspace because they have deep trust in our powerful security and privacy features.<\/p>

Our Cloud business is now widely seen as the leader in cybersecurity. I saw this firsthand when I went to the Munich Security conference in February.<\/p>

Cybersecurity analysts are using Gemini to help spot threats, summarize intelligence and take action against attacks, helping companies like American Family Insurance aggregate and analyze security data in seconds, instead of days.<\/p>

Turning next to YouTube, which continues to grow and lead in streaming. We announced that, on average, viewers are watching over one billion hours of YouTube content on TVs daily.<\/p>

AI experiments like Dream Screen will give anyone the ability to make AI-generated backgrounds for YouTube Shorts.<\/p>

And on subscriptions, which are increasingly important for YouTube, we announced that in Q1, YouTube surpassed 100 million Music and Premium subscribers globally, including trialers.<\/p>

And YouTube TV now has more than eight million paid subscribers.<\/p>

Finally, in Other Bets, Waymo’s fully autonomous service continues to grow ridership in San Francisco and Phoenix, with high customer satisfaction; and we started offering paid rides in Los Angeles, and testing rider-only trips in Austin.<\/p>

Overall it was a great quarter, and there’s more to come. I\/O is in less than three weeks, followed by Brandcast and Google Marketing Live.<\/p>

I want to thank our employees around the world who are at the heart of this progress, and who continue to focus on building innovative products, helpful services, and new opportunities for businesses and partners around the world.<\/p>

Thank you.<\/p>

Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar. And hi, everyone.<\/p>

Google Services revenues of $70 billion were up 14% year-on-year.<\/p>

Search and Other revenues grew 14% year-on-year, led again by solid growth in the Retail vertical, with particular strength from APAC-based retailers, which began in the second quarter of 2023.<\/p>

YouTube Ads revenues were up 21% year-on-year, driven by growth in both direct response and brand. Network revenues declined 1% year-on-year.<\/p>

In Subscriptions, Platforms and Devices, year-on-year revenues increased 18%, driven again by strong growth in YouTube subscriptions.<\/p>

Let’s now talk about a few highlights from the quarter from a product innovation and advertising performance perspective.<\/p>

First, it bears repeating that AI innovation across our ads ecosystem is core to every aspect of our product portfolio -- from targeting, bidding, creative, measurement, and across campaign types.<\/p>

We’ve talked about how solutions like smart bidding use AI to predict future ad conversions and their value in helping businesses stay agile and responsive to rapid shifts in demand. And how products like Broad Match leverage LLMs to match ads to relevant searches and help advertisers respond to what millions of people are searching for. This is foundational.<\/p>

As advances accelerate in our underlying AI models, our ability to help businesses find users at speed and scale and drive ROI just keeps getting better. We’re especially excited about the doors gen AI is opening for creative capabilities -- helping deliver on the premise of getting the right ad, to the right user, in the right moment.<\/p>

Look at Performance Max. In February, we rolled Gemini into PMax. It’s helping curate and generate text and image assets so businesses can meet PMax asset requirements instantly. This is available to all U.S. advertisers and starting to roll out internationally in English. And early results are encouraging.<\/p>

Advertisers using PMax asset generation are 63% more likely to publish a campaign with Good or Excellent Ad Strength. And those who improve their PMax Ad Strength to Excellent see 6% more conversions on average.<\/p>

We’re also driving improved results for businesses opting into Automatically Created Assets, which are supercharged with gen AI. Those adopting ACA see on average 5% more conversions at a similar cost per conversion in Search and Performance Max campaigns.<\/p>

And then there’s Demand Gen. Advertisers are loving its ability to engage new and existing customers and drive purchase consideration across our most immersive and visual touchpoints like YouTube, Shorts, Gmail and Discover.<\/p>

Hollywood film and TV studio Lionsgate partnered with Horizon Media to test what campaign type would deliver the most ticketing page views for its “The Hunger Games: Ballad of Songbirds & Snakes” film. Over a three-week test, Demand Gen was significantly more efficient versus social benchmarks, with an 85% more efficient CPC and 96% more efficient cost per page view. Lionsgate has since rolled out Demand Gen for two new titles.<\/p>

We’re also bringing new creative features to Demand Gen. Earlier this month, we announced new generative image tools to help advertisers create high-quality assets in a few steps, with a few simple prompts. This will be a win for upleveling visual storytelling and testing creative concepts more efficiently.<\/p>

And then there’s obviously Search Generative Experience, which Sundar talked about. I’ll add that innovation in the user experience on Search has historically opened up new opportunities for advertisers. We saw this when we successfully navigated from desktop to mobile. We’re continuing to experiment with new ad formats, including Search and Shopping ads alongside Search results in SGE. And we shared in March how folks are finding ads either above or below the SGE results helpful. We’re excited to have a solid baseline to keep innovating on -- and confident in the role SGE, including ads -- will play in delighting users and expanding opportunities to meet user needs.<\/p>

Which brings me to Search and our strong performance in the first quarter. In Q1, Retail was, again, a top contributor. Our focus remains on driving profitability and growth for retailers, helping them optimize digital performance for both online and offline, as well as innovate across our shopping and merchant experiences. Highlights include continued upsides for retailers leaning into agile budget and bidding strategies across Search, PMax or both.<\/p>

Take home goods retailer IKEA, who leaned into Google’s Store Sales measurement to understand its total omni-channel revenue opportunity across Search. By measuring 2.3 times more revenue and using value-based bidding solutions to bid to its omni-channel customers, IKEA drove a significant increase in omni-revenue in Q1 and is now scaling this strategy globally.<\/p>

We also expanded Local Inventory Ads into 23 countries, helping drive shopper confidence and offline sales. Retailers can convert intent into action by showcasing in-store availability, pricing, pick-up options and more, all in one ad format.<\/p>

Moving to YouTube. Last quarter, I went deep into our strategy. It all starts with creation, which drives viewership, which leads to monetization. A few updates to build on Sundar’s remarks.<\/p>

First, creation, which is all about giving creators the tools to create amazing content, grow their audiences, and build their businesses. In 2023, more people created content on YouTube than ever before; and the number of channels uploading Shorts year-on-year grew 50%.<\/p>

We also hit a new milestone with three million-plus channels in our YouTube Partner Program. We recently shared that YPP has paid out more than any other creator monetization platform, including over $70 billion to creators, artists and media companies over the last three years.<\/p>

From a viewer’s perspective, watchtime across YouTube continues to grow, with strength in both Shorts and CTV.<\/p>

According to Nielsen, YouTube has been the leader in U.S. streaming watchtime for the last 12-plus months.<\/p>

In the first quarter, Living Room benefited from a combination of strong watchtime growth, innovation in the user and advertiser experience, and a shift in brand advertising budgets from linear TV to YouTube.<\/p>

Viewers are watching YouTube because they expect to access everything in one place, across screens and formats -- their favorite creators, live sports, breaking news, educational content, movies, music and more. And advertisers continue to lean in to find audiences they can’t find elsewhere.<\/p>

Which brings me to monetization. We’re pleased with our Q1 performance across both our ads-supported and subscription offerings. Sundar covered subscription growth.<\/p>

On the Ads front, direct and brand were both strong this quarter. Shorts monetization continued to improve, with Shorts ads now supported on mobile, tablet, living room, and desktop and available to both performance and brand advertisers.<\/p>

In the U.S., the monetization rate of Shorts relative to instream viewing has more than doubled in the past 12 months, including a ten-point sequential improvement in the first quarter alone.<\/p>

Just last week, we introduced new ways for brands to get the most out of their Shorts ads with new lineups on YouTube Select, including sports; beauty, fashion and lifestyle; and entertainment. For YouTube advertisers, increasing Brand Lift is one of the core goals.<\/p>

In Q1, we saw strong traction from the introduction of a Pause Ads pilot on connected TVs, a new non-interruptive ad format that appears when users pause their organic content. Initial results show that Pause ads are driving strong Brand Lift results and are commanding premium pricing from advertisers.<\/p>

Before I wrap, two quick highlights on how we’re helping our partners transform and accelerate impact with the best across Google.<\/p>

Number one, to help McDonald’s build the “restaurant of the future,” we’re deepening our partnership across Cloud and Ads. Part of this includes them connecting Google Cloud’s latest hardware and data technologies across restaurants globally and starting to apply gen AI to enhance its customer and employee experiences.<\/p>

Number two, WPP. At Google Cloud Next, we announced a new collaboration that will redefine marketing through the integration of our Gemini models with WPP Open, WPP’s AI-powered marketing operating system already used by more than 35,000 of its people and adopted by key clients including The Coca-Cola Company, L’Oreal and Nestle. We’re just getting started here and excited about the innovation this partnership will unlock.<\/p>

With that, a huge thank you to our customers and partners, many of whom we’re excited to see at Google Marketing Live and Brandcast in just a few weeks. And a huge thank you, as always, to our incredible teams for their agility and hard work this quarter.<\/p>

Ruth, you’re up!<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> Thank you, Philipp.<\/p>

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 re-engineer our cost base.<\/p>

My comments will be on year-over-year comparisons for the first quarter, unless I state otherwise.<\/p>

I will start with results at the Alphabet level, followed by segment results, and conclude with our outlook.<\/p>

For the first quarter, our consolidated revenues were $80.5 billion, up 15% or up 16% in constant currency. Search remained the largest contributor to revenue growth.<\/p>

In terms of total expenses, the year-on-year comparisons reflect the impact of the restructuring charges we took in the first quarter of 2023, of $2.6 billion, as well as the $716 million in employee severance and related charges in the first quarter of 2024.<\/p>

As you can see in our earnings release, these charges were allocated across the expense lines in Other Cost of Revenues and OpEx based on associated headcount. To help with year-on-year comparisons, we included a table in our earnings release to adjust Other Cost of Revenues, operating expenses, operating income and operating margin to exclude the impact of severance and related office space charges in the first quarter of 2023 versus 2024.<\/p>

In terms of expenses, total Cost of Revenues was $33.7 billion, up 10%.<\/p>

Other Cost of Revenues was $20.8 billion, up 10% on a reported basis, with the increase driven primarily by content acquisition costs associated with YouTube, given the very strong revenue growth in both subscription offerings and ad-supported content.<\/p>

On an adjusted basis, Other Cost of Revenues were up 13% year-on-year.<\/p>

Operating expenses were $21.4 billion, down 2% on a reported basis, primarily reflecting expense decreases in sales and marketing and G&A, offset by an increase in R&D. The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters.<\/p>

On an adjusted basis, operating expenses were up 5%, reflecting; first, in R&D, an increase in compensation expense, primarily for Google DeepMind and Cloud; and second, in Sales and Marketing a slight increase year-on-year, reflecting increases in compensation expense, primarily for Cloud sales.<\/p>

Operating income was $25.5 billion, up 46% on a reported basis, and our operating margin was 32%.<\/p>

On an adjusted basis, operating income was up 31%, and our operating margin was 33%.<\/p>

Net income was $23.7 billion, and EPS was $1.89.<\/p>

We delivered free cash flow of $16.8 billion in the first quarter and $69.1 billion for the trailing 12 months. We ended the quarter with $108 billion in cash and marketable securities.<\/p>

Turning to segment results, within Google Services, revenues were $70.4 billion, up 14%.<\/p>

Google Search & Other advertising revenues of $46.2 billion in the quarter were up 14%, led again by growth in retail.<\/p>

YouTube advertising revenues of $8.1 billion, were up 21%, driven by both direct response and brand advertising.<\/p>

Network advertising revenues of $7.4 billion were down 1%.<\/p>

Subscriptions, Platforms and Devices revenues were $8.7 billion, up 18%, primarily reflecting growth in YouTube subscription revenues.<\/p>

TAC was $12.9 billion, up 10%.<\/p>

Google Services Operating Income was $27.9 billion, up 28%, and the operating margin was 40%.<\/p>

Turning to the Google Cloud segment, revenues were $9.6 billion for the quarter, up 28%, reflecting significant growth in GCP, with an increasing contribution from AI and strong Google Workspace growth, primarily driven by increases in average revenue per seat.<\/p>

Google Cloud delivered Operating Income of $900 million and an operating margin of 9%.<\/p>

As to our Other Bets, for the first quarter, revenues were $495 million, benefiting from a milestone payment in one of the Other Bets. The operating loss was $1 billion.<\/p>

Turning to our outlook for the business, with respect to Google Services. First, within Advertising, we are very pleased with the momentum of our Ads businesses. Search had broad-based strength across verticals. In YouTube, we had acceleration in revenue growth driven by brand and direct response.<\/p>

Looking ahead, two points to call out. First, results in our advertising business in Q1 continued to reflect strength in spend from APAC-based retailers, a trend that began in the second quarter of 2023 and continued through Q1, which means we will begin lapping that impact in the second quarter.<\/p>

Second, the YouTube acceleration in revenue growth in Q1 reflects, in part, lapping the negative year-on-year growth we experienced in the first quarter of 2023.<\/p>

Turning to Subscriptions, Platforms and Devices. We continue to deliver significant growth in our subscriptions business, which drives the majority of revenue growth in this line. The sequential quarterly decline in year-on-year revenue growth for the line in Q1, versus Q4, reflects, in part, the fact that we had only one week of Sunday Ticket subscription revenue in Q1 versus fourteen weeks in Q4.<\/p>

Looking forward, we will anniversary last year’s price increase in YouTube TV starting in May.<\/p>

With regard to Platforms, we are pleased with the performance in Play driven by an increase in buyers.<\/p>

With respect to Google Cloud, performance in Q1 reflects strong demand for our GCP infrastructure and solutions, as well as the contribution from our Workspace productivity tools. The growth we are seeing across Cloud is underpinned by the benefit AI provides for our customers. We continue to invest aggressively, while remaining focused on profitable growth.<\/p>

As we look ahead, two points that will affect sequential year-on-year revenue growth comparisons across Alphabet.<\/p>

First, Q1 results reflect the benefit of Leap Year, which contributed slightly more than one point to our revenue growth rate at the consolidated level in the first quarter.<\/p>

Second, at current spot rates, we expect a larger headwind from foreign exchange in Q2 versus Q1.<\/p>

Turning to margins, our efforts to durably re-engineer our cost base are reflected in a 400 basis point expansion of our Alphabet operating margin year-on-year, excluding the impact of restructuring and severance charges in both periods.<\/p>

You can also see the impact in the quarter-on-quarter decline in headcount in Q1, which reflects both actions we have taken over the past few months and a much slower pace of hiring.<\/p>

As we have discussed previously, we are continuing to invest in top engineering and technical talent, particularly in Cloud, Google DeepMind and Technical Infrastructure.<\/p>

Looking ahead, we remain 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. We believe these efforts will enable us to deliver full-year 2024 Alphabet operating margin expansion relative to 2023.<\/p>

With respect to CapEx, our reported CapEx in the first quarter was $12 billion, once again driven overwhelmingly by investment in our technical infrastructure, with the largest component for servers, followed by data centers.<\/p>

The significant year-on-year growth in CapEx in recent quarters reflects our confidence in the opportunities offered by AI across our business.<\/p>

Looking ahead, we expect quarterly CapEx throughout the year to be roughly at or above the Q1 level, keeping in mind that the timing of cash payments can cause variability in quarterly reported CapEx.<\/p>

With regard to Other Bets, we similarly have workstreams under way to enhance overall returns.<\/p>

Finally, as I trust you saw in the press release, we are very pleased to be adding a quarterly dividend of $.20 per share to our capital return program, as well as a new $70 billion authorization in share repurchases.<\/p>

The core of our capital allocation framework remains the same, beginning with investing aggressively in our business as you have heard us talk about today, given the extraordinary opportunities ahead. We view the introduction of the dividend as further strengthening our overall capital return program.<\/p>

Thank you. Sundar, Philipp and I will now take your questions.<\/p>

Operator:<\/strong> Thank you.<\/p>

As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>

And our first question comes from Brian Nowak with Morgan Stanley. Please go ahead.<\/p>

Brian Nowak (Morgan Stanley):<\/strong> Great. Thanks for taking my question. I have two.<\/p>

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? Have there been any changes in sort of your commercial query trend growth as there’s been all these new entrants moving around in e-commerce, is my first one.<\/p>

The second one for Ruth. When you talked about sort of more efforts to moderate expense growth from here, can you just sort of give us some examples of areas where you still see the potential for more optimization or workstreams in place to continue to durably reengineer the OpEx space as we go throughout 2024? Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Brian.<\/p>

To your first question, 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.<\/p>

Overall, I think with generative AI in Search, with our AI overviews, we are definitely -- 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 it all seems to carry over across query categories. Obviously, it’s still early, and we are going to be measured and put user experience in front, but we are positive about what this transition means.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> And on the second question, in terms of the various workstreams, as both Sundar and I said, we remain very focused on the ongoing efforts to slow the pace of expense growth, what we have been calling durably reengineering our cost base.<\/p>

I made this point in opening comments, but we are very cognizant of the increasing headwind we have from higher depreciation and expenses associated with the higher CapEx and so these efforts are ongoing.<\/p>

They are very much the same that we have talked with you about previously. It starts with product and process prioritization, all of the work around organizational efficiency and structure, these are ongoing.<\/p>

As an example, the work that Sundar talked about combining Devices and Services with our Platforms and Ecosystems product areas is a really good example, because unifying the teams not only helps us deliver higher-quality products and experiences, but we think it enables us to move with greater velocity and efficiency.<\/p>

And then the other workstreams we’ve talked to you about in the past, like all of the work around technical infrastructure which Sundar alluded to; streamlining operations within the company through the use of AI; what we’re doing with procurement with our suppliers and vendors, which he also referenced; the work you’ve seen on real estate optimization -- these are all ongoing workstreams, which is why we have them under the umbrella of durably re-engineering our cost base and they are ongoing.<\/p>

Operator:<\/strong> Our next question comes from Doug Anmuth with JPMorgan. Your line is now open.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Thanks for taking the questions.<\/p>

Sundar, you talked about bringing more Generative AI features into the main Search page. Can you just talk about what kind of queries or scenarios you think that that’s working best for so far and just how we should think about the cadence of continuing to adopt more of those features within Core Search?<\/p>

And then, Ruth, on CapEx spending, the $12 billion in 1Q, can we assume that run-rating that and above is reasonable for this year? And I know it’s very early, but should we generally expect higher CapEx next year as well?<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Doug.<\/p>

On SGE and Search, look, I think it tends to really -- we are seeing early confirmation of our thesis that this will expand the universe of queries where we are able to really provide people with a mix of factual answers, linked to sources across the web and bring a variety of perspectives, all in an innovative way. And we have been rolling out AI overviews in the U.S. and U.K., trying to mainly tackle queries, which are more complex where we think SGE will clearly improve the experience.<\/p>

We’ve already served billions of queries, and it seems to cut across categories. But we are still continuing our testing and we are metrics-driven in these areas. But I am optimistic that it clearly improves the user experience. Users are telling us that. And we’re seeing it in our metrics, and we’ll continue evolving it through the course of this year.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> And 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.<\/p>

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 have spoken about, and our lead with Gemini.<\/p>

I will note that most -- nearly all, I should say, of the CapEx was in our Technical Infrastructure. We expect that our investment in office facilities will be about less than 10% of the total CapEx in 2024, roughly flat with our CapEx in 2023, but is still there.<\/p>

And then with respect to 2025, as you said, it’s premature to comment, so nothing to add on that.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Great, thank you.<\/p>

Operator:<\/strong> Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.<\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thanks so much. Maybe just one question of the big-picture nature for Sundar.<\/p>

To come back to your earlier comments at the beginning of the call in framing up longer-term initiatives and longer-term narratives, wanted to know if you could talk a little bit about both the opportunities and the challenges of operating at scale in a time like this where there’s a lot of technology innovation going on. And how you see the elements of trying to strike a balance towards moving the organization forward while still continuing to both invest for growth as well as balance margin. Thanks so much.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Eric. Great question.<\/p>

Obviously, the AI transition, I think it’s a once-in-a-generation kind of opportunity. We’ve definitely been gearing up for this for a long time. You can imagine, we started building TPUs in 2016, so we have definitely been gearing up for a long time.<\/p>

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.<\/p>

In terms of the challenges, I think making sure -- I think we are constantly -- I think it’s been a mindset shift, which we’ve been driving across the company, to make sure that we are embracing this opportunity, but being very efficient in how we are approaching it. Making sure we are redirecting our people to the highest priorities across the company; building on our 20 years of experience in driving machine efficiencies year-on-year so that we can put our dollars to work as efficiently as possible.<\/p>

So making sure balancing all of that moving forward in a very bold and responsible way at the same time, those are the important things to get right from my perspective.<\/p>

Operator:<\/strong> Our next question comes from Stephen Ju with UBS. Your line is now open.<\/p>

Stephen Ju (UBS):<\/strong> Thank you so much. Hi, Philipp.<\/p>

I think it’s approaching the two-year anniversary for the launch of Ads on YouTube Shorts. I think you’ve given us an update on monetization pickup sequentially.<\/p>

With that in mind, I think YouTube has launched an array of ad products and automation tools to help advertisers transfer what they’re doing to the vertical screen. So how is this translating into buy-in among your advertiser clients?<\/p>

And, secondly, based on what you have seen over the last two years, are there any structural reasons that you can cite as to why the monetization cannot match what is already the case on the horizontal screen? Thanks.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yeah, look, this is a great question.<\/p>

First of all, I mean, let’s start with the fact that YouTube performance was very strong this quarter. And on Shorts specifically, in the U.S., I mentioned how the monetization rate of Shorts relative to instream viewing has more than doubled in the last 12 months. I think that’s what you were referring to. And, yes, we are, obviously, very happy with this development.<\/p>

The way to think about it is advertisers really only spend with us when they see a positive ROI. So you can assume that this wouldn’t be happening unless it were to work for advertisers in the short term and also in the long term. That’s an important part, I think.<\/p>

Overall, Shorts is a long-term bet for the business. It has really helped us respond to both creator and viewer demand for short-form video. We talked about the strong growth averaging 70 billion daily views. I mentioned the number of channels, uploading has increased 50% year-over-year. So, again, very happy with this development.<\/p>

And to your question, structural reasons, whether we can’t get to a match here, I have a hard time seeing those, at the moment, over time.<\/p>

Stephen Ju (UBS):<\/strong> Thank you.<\/p>

Operator:<\/strong> Our next question comes from Justin Post with Bank of America. Your line is now.<\/p>

Justin Post (BAML):<\/strong> Thank you. I’m going to ask another one about CapEx. It seems to be your biggest investment area.<\/p>

Just first, you saw the big uptick the last two quarters, but you have been investing in AI for years. Is the uptick because supply is getting easier to get? Or do you see more opportunities with the available supply to really fuel AI, so as the GPUs and everything have gotten better, that you feel more -- investing more?<\/p>

And then, thinking about the returns, both for advertising and Cloud on the CapEx, do you feel like this is a higher cost of doing business? Or do you think this is an opportunity to even get better returns on your capital spend than you’ve had in the past? Thank you.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> 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.<\/p>

And it really goes to the second part of your question, which is that as we’re investing in CapEx and applying it across our various businesses, it opens up more service and products, which bring revenue opportunities, and we’re very focused on the monetization opportunity. It does underlie everything that we’re doing in Google Services and Google Cloud.<\/p>

And as Sundar noted, we’re at the same time, very focused on the efficiency of all elements of delivering that compute capacity from hardware, software and beyond.<\/p>

Operator:<\/strong> Our next question comes from Mark Mahaney with Evercore. Your line is now open.<\/p>

Jian Li (Evercore): <\/strong>Thank you. This is Jian Li for Mark Mahaney. A couple of questions.<\/p>

One, just maybe an expansion on the Search query questions from before. More like Search volume and maybe in the context of the off-Google environments, like AI chatbots, for example, we’ve seen kind of Meta AI directing to Google Search results.<\/p>

Do you think there’s actually a scenario where an AI system can create a step-function change in Search volume or use cases off Google? Can you give us more color on what you are seeing right now or what you are expecting to see in that area?<\/p>

And then the second question on just the comment of YouTube and Cloud exiting at a $100 billion run rate. What is informing this outlook of visibility for you? If you can talk about is it driven by any sort of Cloud-demand inflection or step-change in the gen AI workload demand? If you can flush it out a little bit, thanks so much.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> In your first question, I said this before, but to be clear, we view this moment as a positive moment for Search. I think it allows us to evolve our product in a profound way. And Search is a unique experience. People come and they get to -- be it if you want answers, if you want to explore more, if you want to get perspectives from across the web, and to be able to do it across the breadth and depth of everything they’re looking for.<\/p>

And the innovation you would need to keep that up, I think it’s what we’ve been building on for a long time. And so I feel we are extraordinarily well set up, particularly given the innovation path we are on. And overall, I view this moment as a positive moment.<\/p>

So that’s how I would say it. On the second part, Ruth?<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> I’m sorry, what was this -- I think --<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> The YouTube and Cloud.<\/p>

Jian Li (Evercore): <\/strong>In terms of your comment about a $100 billion exit rate for YouTube and Cloud, what’s driving this visibility for you? And any kind of inflection you are seeing in the Cloud demand.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> 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, the strong performance.<\/p>

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.<\/p>

We had similar comments last quarter when you talk about our Subscriptions business. We’re really proud of all the work that 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 had built over the years.<\/p>

Operator:<\/strong> Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>

Ken Gawrelski (Wells Fargo):<\/strong> Thank you very much. Two, if I may.<\/p>

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? Do you plan to address most of these organically, or could a partner approach work for you?<\/p>

And then the second one, just more detail on YouTube and sports rights. Could you reiterate your view on further live sports rights? There’s some larger, mostly in the U.S., league rights coming up soon, and will be more over the next several years. Could you just talk about your philosophy there beyond NFL Sunday Ticket? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks. 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’re engaged in a number of conversations.<\/p>

I think be it 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.<\/p>

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 will see us do it both organically and with a strong partner program as well. So we will do it with a combination.<\/p>

And the challenges here, always, there are switching costs to Cloud and the challenges we see is how do we make it easier for people. There’s a lot of interest, but there’s definitely barriers in terms of people switching. And so that’s an area where we are constantly investing to make it easier for our customers.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> With regard to your sports rights question, look, we’ve had longstanding and significant partnerships with the most popular sports leagues here in the U.S. and 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; NFL Sunday Ticket, YouTube TV, YouTube Primetime Channels and so on.<\/p>

But there’s nothing that we have to announce at the moment. We are obviously always looking at where we can create more value for our users, for advertisers, for creators; but nothing specific to talk about at this moment.<\/p>

Ken Gawrelski (Wells Fargo):<\/strong> Thank you.<\/p>

Operator:<\/strong> Our next question comes from Ross Sandler with Barclays. Your line is now open.<\/p>

Ross Sandler (Barclays):<\/strong> Great. Sundar, I have 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.<\/p>

So the question is, if 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?<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Look, I think, if you look at what users are looking for, people are looking for information and an ability to connect with things outside.<\/p>

So I think there will be a set of use cases which you’ll be able to do on-device, but for a lot of what people are looking to do, I think you will need the richness of the cloud, the web, and you have to deliver it to users.<\/p>

So again to my earlier comments, I think through all these moments, you saw what we have done with Samsung with Circle to Search. I think it gives a new way for people to access Search conveniently wherever they are. And so I view this as a positive way to bring our services to users in a more seamless manner. So I think it’s positive from that perspective.<\/p>

In terms of on-device versus cloud, there will be needs which can be done on-device, and we should, to help it from a privacy standpoint. But there are many, many things for which people will need to reach out to the cloud. And so I don’t see that as being a big driver in the on-cloud versus off-cloud in any way.<\/p>

Operator:<\/strong> And our last question comes from Colin Sebastian with Baird. Your line is now open.<\/p>

Colin Sebastian (Baird):<\/strong> Thanks. Good afternoon.<\/p>

I guess first, follow-up on some of the questions on SGE and 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.<\/p>

And then secondly on the hardware roadmap, I assume later this year we’ll hear more about some of the products. But any areas of particular focus that you would point out that we should keep in mind in terms of hardware launches in the back half? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> On the first question on Search, not much more to add to what I said. But what we’ve seen, and remember we have been in live experiments just for a few weeks in the U.S. and U.K. and on a slice of our queries, 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.<\/p>

But if you were to step back, at this moment, there were a lot of questions last year, and we always felt confident and comfortable that we would be able to improve the user experience. People question whether these things would be costly to serve, and we are very, very confident we can manage the cost of how to serve these queries.<\/p>

People worried about latency. I think when I look at the progress we have made in latency and efficiency, we feel comfortable.<\/p>

There are questions about monetization. Based on our testing so far, I am comfortable and confident that we’ll be able to manage the monetization transition here well as well.<\/p>

It will play out over time, but I feel we are well-positioned. And more importantly, when I look at the innovation that’s ahead and the way the teams are working hard on it, I am very excited about the future ahead.<\/p>

Operator:<\/strong> Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Jim Friedland for any further remarks.<\/p>

Jim Friedland, Director Investor Relations:<\/strong> Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2024 call. Thank you, and have a good evening.<\/p>

Operator:<\/strong> Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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 <\/div>
Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/span><\/p>

This transcript is provided for the convenience of investors only, for a full recording please see the <\/i>Q2 2024 Earnings Call webcast<\/u><\/i><\/a>.<\/i><\/p>

Operator:<\/strong> Welcome, everyone. Thank you for standing by for the Alphabet Second Quarter 2024 Earnings conference call.<\/p>

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session you will need to press *1 on your telephone.<\/p>

I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>Thank you. Good afternoon, everyone. And welcome to Alphabet’s Second Quarter 2024 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat.<\/p>

Now I’ll quickly cover the Safe Harbor.<\/p>

Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement.<\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>

Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>

And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thank you, Jim. And hello, everyone.<\/p>

I’m really pleased with our results this quarter. They show tremendous ongoing momentum in Search and great progress in Cloud, with our AI initiatives driving new growth.<\/p>

Search had another excellent quarter. And in terms of product innovation, we are seeing great progress with AI Overviews.<\/p>

In Q2, Cloud reached some major milestones. Quarterly revenues crossed the $10 billion mark for the first time, and at the same time passed 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.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

Over the past 25 years, we’ve continued to reimagine and expand Google Search across many technological shifts.<\/p>

With AI, we are delivering better responses on more types of Search queries, and introducing new ways to Search.<\/p>

We’re 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.<\/p>

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 18-24, when they use Search with AI Overviews.<\/p>

As we’ve said, we’re continuing to prioritize approaches that send traffic to sites across the web. And we’re seeing that Ads appearing either above or below AI Overviews continue to provide valuable options for people to take action and connect with businesses.<\/p>

Beyond AI Overviews, AI expands the types of queries we are able to address, and opens up powerful new ways to search.<\/p>

Visual search via Lens is one. Soon, you’ll be able to ask questions by taking a video with Lens. And already, we’ve seen that AI Overviews in Lens leads to an increase in overall visual search usage.<\/p>

Another example is Circle to Search, which is available today on more than 100 million Android devices.<\/p>

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.<\/p>

Gemini now comes in four 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.<\/p>

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 is truly bringing AI to everyone. Gemini is powering incredibly helpful features in Search, Workspace, Google Messages and more.<\/p>

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?”<\/p>

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.<\/p>

Our AI product advances come from our longstanding foundation of research leadership, as well as our global network of infrastructure.<\/p>

In Q2, we announced our first data center and Cloud region in Malaysia, and expansion projects in Iowa, Virginia and Ohio.<\/p>

Our TPUs are a key bet here, too. Trillium is the sixth generation of our custom AI accelerator, and it is our best-performing and most energy-efficient TPU to date.<\/p>

It achieves a near 5X increase in peak compute performance per chip and is 67% more energy-efficient compared to TPU v5e.<\/p>

And the latest NVIDIA Blackwell platform will be coming to Google Cloud in early 2025.<\/p>

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.<\/p>

Of course, as we do this, we will continue to create capacity by allocating resources towards our highest priorities. We are relentlessly driving efficiencies in our AI models.<\/p>

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 Overview served flat.<\/p>

And we are focused on matching the right model size to the complexity of the query, in order to minimize impact on costs and latency.<\/p>

Separately, on our real estate investments, we’re taking a measured approach to match the current and future needs of our hybrid workforce, as well as our local communities.<\/p>

Next, Google Cloud.<\/p>

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 their large customer base.<\/p>

Our momentum begins with our AI Infrastructure, which provides AI start-ups like Essential AI with leading cost performance for models and high-performance computing applications.<\/p>

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.<\/p>

Our enterprise AI platform, Vertex, helps customers such as Deutsche Bank, Kingfisher and the U.S. Air Force build powerful AI agents.<\/p>

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.<\/p>

We broadened support for third-party models, including Anthropic’s Claude 3.5 Sonnet, and open source models like Gemma 2, Llama and Mistral.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

Cybersecurity 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 help manage.<\/p>

Our strong track record of uptime, quality control and reliability make 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.<\/p>

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.<\/p>

We had a great Brandcast this quarter, and Philipp will say more. I’m pleased at the progress here. YouTube has remained number one in U.S. streaming watchtime, according to Nielsen. Views of YouTube Shorts on connected TVs more than doubled last year, and we’re making it easier for creators to add captions, and turn regular videos into Shorts.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

In Other Bets, I’m really pleased with the progress Waymo is making, a real leader in the space and getting rave reviews from users. Waymo has served more than 2 million trips to date, and driven more than 20 million fully autonomous miles on public roads. Waymo is now delivering well over 50,000 weekly paid, public rides, primarily in San Francisco and Phoenix.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

Thanks as always to our employees and partners everywhere for a great Q2.<\/p>

With that, over to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>Thanks, Sundar. And hello, everyone.<\/p>

Starting with performance, Google Services delivered revenues of $73.9 billion for the quarter, up 12% year-on-year.<\/p>

Search & Other revenues grew 14% year-on-year, led by growth in the Retail vertical, followed by Financial Services.<\/p>

YouTube Ads revenues were up 13% year-on-year, driven by growth in brand, as well as direct response.<\/p>

Network revenues declined 5% year-on-year.<\/p>

In Subscriptions, Platforms and Devices, year-on-year revenues increased 14%, driven again by strong growth in YouTube subscriptions.<\/p>

For the rest of my remarks, I want to double-click on two topics. First, how we are applying AI across the marketing process to deliver an even stronger Ads experience. Second, YouTube’s position as the leading multi-format platform. So let me start by sharing some of the ways we are applying AI to bring more performance benefits to even more businesses.<\/p>

Q2 brought several major opportunities to meet and learn from users, developers, creators and customers. From I\/O to Brandcast, Google Marketing Live, and Cannes, a growing number of our customers and partners are looking to understand how to successfully incorporate AI into their businesses.<\/p>

This quarter we announced over 30 new Ads features and products to help advertisers leverage AI and keep pace with the evolving expectations of customers and users. Across Search, PMax, Demand Gen and Retail, we are applying AI to streamline workflows, enhance creative asset production and provide more engaging experiences for consumers.<\/p>

Listening to our customers, retailers in particular have welcomed AI-powered features to help scale the depth and breadth of their assets.<\/p>

For example, as part of a new and easier-to-use Merchant Center, we’ve expanded Product Studio with tools that bring the power of Google AI to every business owner. You can upload a product image, prompt the AI with something like “feature this product with the Paris skyline in the background,” and Product Studio will generate campaign-ready assets.<\/p>

I also hear great feedback from our customers on many of our other new AI-powered features. We are beta testing virtual try-on in shopping ads, and plan to roll it out widely later this year. Feedback shows this feature gets 60% more high-quality views than other images and a higher click-out to retailer sites. Retailers love it because it drives purchasing decisions and fewer returns.<\/p>

Our AI-driven profit optimization tools have been expanded to Performance Max and Standard Shopping campaigns. Advertisers who use profit optimization in Smart Bidding see a 15% uplift in profit, on average, compared to revenue-only bidding.<\/p>

Lastly, Demand Gen is rolling out to Display & Video 360 and Search Ads 360 in the coming months, with new generative image tools that create stunning, high-quality image assets for social marketers. As we said at GML, when paired with Search or PMax, Demand Gen delivers an average of 14% more conversions.<\/p>

The use cases we are seeing across the industry show the incredible potential of these AI-enabled products to improve performance. Let me briefly share two examples with you.<\/p>

Luxury jewelry retailer Tiffany leveraged Demand Gen during the holiday season and saw a 2.5% brand lift in consideration and actions, such as adding items to carts and booking appointments. The campaign drove a 5.6 times more efficient cost-per-click compared to social media benchmarks.<\/p>

Our own Google Marketing team used Demand Gen to create nearly 4,500 ad variations for a Pixel 8 Campaign shown across YouTube, Discover and Gmail, delivering twice the click-through rate at nearly a quarter of the cost.<\/p>

In addition to strengthening our Ads products for customers, we continue to evolve our existing systems and products with improved models, delivering further performance gains.<\/p>

In just six months, AI-driven improvements to quality, relevance and language understanding have improved Broad Match performance by 10% for advertisers using Smart Bidding.<\/p>

Also, advertisers who adopt PMax to Broad Match and Smart Bidding in their Search campaigns, see an average increase of over 25% more conversions or value at a similar cost.<\/p>

We’ll continue to listen to our customers and use their feedback to drive innovation across our products. As you can hear, I continue to be excited about the AI era for Ads.<\/p>

Now let’s turn to YouTube. I’ve talked before about our approach to making YouTube the best place to create, watch and monetize.<\/p>

First, the best place to create. What sets YouTube apart from every other platform are the creators and the connection they have with their fans. Audiences tuning in to watch their favorite creators continue to grow. For example, two weeks ago, MrBeast’s channel hit more than 300 million subscribers.<\/p>

Next, the best place to watch. Our long-term investment in CTV continues to deliver. Views on CTV have increased more than 130% in the last three years.<\/p>

According to Nielsen, YouTube is the number one most-watched streaming platform on TV screens in the U.S. for the 17th consecutive month.<\/p>

Zooming out, when you look not just at streaming but at all media companies and their combined TV viewership, YouTube is the second most-watched after Disney.<\/p>

And this growth is happening in multiple verticals, including Sports, which has seen CTV watchtime on YouTube grow 30% year over year.<\/p>

Lastly, the best place to monetize. CTV on YouTube is continuing to benefit from a combination of strong watchtime growth, viewer and advertiser innovation, and a shift in brand advertising budgets from linear TV to YouTube.<\/p>

Our largest advertisers across verticals, including retail, entertainment, telco, and home and personal care are partnering with creators on ads and organic integrations.<\/p>

Verizon, for example, worked with a YouTube creator and Verizon customer to show the many ways their plans and offerings can be customized to fit people’s lives. Using AI-powered formats, they created sketches in multiple lengths and orientations to serve the right creative to the right viewer and drive people to their site. Verizon’s creator ads had a 15% lower CPA and 38% higher conversion rate versus other ads.<\/p>

Turning to Shorts. Last quarter, I shared that in the U.S., the monetization rate of YouTube Shorts relative to instream viewing is showing a healthy rate of growth.<\/p>

Again, this quarter, we continued to see an improvement in Shorts monetization, particularly in the U.S. We’re also seeing a very encouraging contribution from brand advertising on Shorts, which we launched on the product in Q4 last year.<\/p>

Lastly, a few words on Shopping. Last year, viewers watched 30 billion hours of shopping-related videos, and we saw a 25% increase in watchtime for videos that help people shop. While it’s still early days, Shopping remains a key area of investment.<\/p>

At GML, we rolled out several product updates to YouTube Shopping, helping creators sell products to their viewers. These updates included; product tagging, where creators can tag products in their videos for viewers to discover and purchase, product collections, and a new Affiliate Hub, a one-stop shop for creators to find deals and promotional offers from brands and track their affiliate earnings.<\/p>

With that, I’ll finish by saying a huge thank you to Googlers everywhere for their extraordinary commitment, and to our customers and partners for their continued collaboration and trust.<\/p>

And Ruth, thanks for your amazing leadership and partnership over all these years. Now, for one last time, it’s over to you.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> 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 re-engineer our cost base. My comments will be on year-over-year comparisons for the second quarter, unless I state otherwise.<\/p>

I will start with results at the Alphabet level, followed by segment results, and conclude with our outlook.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters.<\/p>

Operating income was $27.4 billion, up 26%, and our operating margin was 32%.<\/p>

Net income was $23.6 billion, and EPS was $1.89.<\/p>

We delivered free cash flow of $13.5 billion in the second quarter and $60.8 billion for the trailing 12 months.<\/p>

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 will do so again next quarter.<\/p>

We ended the quarter with $101 billion in cash and marketable securities.<\/p>

Turning to segment results. Within Google Services, revenues were $73.9 billion, up 12%.<\/p>

Google Search & 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.<\/p>

YouTube advertising revenues of $8.7 billion were up 13%, driven by brand, followed by direct response advertising.<\/p>

Network advertising revenues of $7.4 billion were down 5%.<\/p>

Subscriptions, Platforms and Devices revenues were $9.3 billion, up 14%, primarily reflecting growth in YouTube subscription revenues.<\/p>

TAC was $13.4 billion, up 7%.<\/p>

Google Services Operating Income was $29.7 billion, up 27%, and the operating margin was 40%.<\/p>

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.<\/p>

Google Cloud delivered operating income of $1.2 billion and an operating margin of 11%.<\/p>

As to our Other Bets for the second quarter, revenues were $365 million and the operating loss was $1.1 billion.<\/p>

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 watchtime 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.<\/p>

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.<\/p>

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 the price increase for YouTube TV in the second quarter last year. The impact will persist through the balance of the year.<\/p>

Second, with regard to Platforms, we are pleased with the performance in Play, driven by an increase in buyers.<\/p>

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.<\/p>

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 profits. 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.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

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 are continuing to invest in top engineering and technical talent, particularly in Cloud and Technical Infrastructure.<\/p>

Looking forward, we continue to expect to deliver full year 2024 Alphabet operating margin expansion relative to 2023.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

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.<\/p>

As you will see in the 10-Q, we have chosen to commit to a new multiyear 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.<\/p>

To close, this is my 56th and last earnings call, 37 of them at Alphabet, so I have a few closing thoughts of gratitude.<\/p>

I have 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.<\/p>

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.<\/p>

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.<\/p>

Technology has been a catalyst for economic growth throughout human history. The people on this call know that if 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.<\/p>

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.<\/p>

Thank you. Sundar, Philipp and I will now take your questions.<\/p>

Operator: <\/strong>Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>

Your first question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>

Brian Nowak (Morgan Stanley):<\/strong> Thanks for taking my questions. First, thank you Ruth for all of the help and significant impact over the past decade.<\/p>

The first one, it’s a little bit of a jump ball, I guess, for Sundar, Philipp or Ruth. I guess we’re sort of 18 months into this fever pitch around a GenAI focus in the world. Maybe from any of your perspectives, can you sort of talk to us about areas where you’ve seen faster-than-expected traction, testing, or adoption of some of the Generative AI capabilities versus slower-than-expected traction and testing, from a Google perspective?<\/p>

And then Ruth, appreciate all the comments about structurally re-engineering 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.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Brian, thanks. I’ll take the first part. I think it’s a good question.<\/p>

Obviously, I think there is a time curve in terms of taking the underlying technology and translating it into meaningful solutions across the board, both on the consumer and the enterprise side.<\/p>

Definitely on the consumer side, I’m pleased, as I said in my comments earlier, in terms of how, for a product like Search, which is used at scale over many decades, how we’ve been able to introduce it in a way that it’s additive and enhances the overall experience and is positively contributing there.<\/p>

I think across our consumer products, we are seeing progress on the organic side. Obviously, monetization is something we will have to earn on top of it.<\/p>

On the enterprise side, I think we are at a stage where there are definitely a lot of models. I think roughly the models are all kind of converging towards a sort of base capabilities but I think where the next wave is working is to build solutions on top of it.<\/p>

And I think there are pockets, be it coding, be it in customer service, et cetera, where we are seeing some of those use cases seeing traction. But I still think there’s hard work there to completely unlock those.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google: <\/strong>And on your second question, first, thank you for your comments.<\/p>

Look, the reason we consistently use the term, the phrase, that we’re focused on durably re-engineering our cost base is because these are deep workstreams. They’re 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.<\/p>

Both of those are reflected in the headcount and the fact that headcount is down year-on-year. Across all of those, as I said, across our entire leadership team, we remain focused on continuing to execute against them.<\/p>

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.<\/p>

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.<\/p>

And then more broadly, all of the workstreams 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 workstreams around technical infrastructure and improving efficiency there.<\/p>

We’re also working on the use of AI across Alphabet. We’re continuing to build on what we’ve done with our centralized procurement organization. We’re 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 re-engineering our cost base.”<\/p>

Brian Nowak (Morgan Stanley):<\/strong> Great. Thank you both.<\/p>

Operator:<\/strong> And our next question comes from Doug Anmuth with JPMorgan. Your line is now open.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Thanks for taking questions. One for Ruth and one for Sundar.<\/p>

Ruth, you’ve now had Google Services operating margins roughly 40% for the past two quarters. Just as you create more capacity to help offset the future investments, is it reasonable to think that you could sustain at those kind of levels going forward?<\/p>

And then, Sundar, just as it relates to AI Overviews, you talked about the positive trends there. Can you just help us understand where you are, how far along in rolling out AI Overviews? Then any more color around sort of click-through rates and monetization levels relative to your traditional searches? Thanks.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> So in terms of the Google Services operating margin, it did reflect all the work that we’re doing on durably re-engineering the cost base. It also reflected the benefit of strong revenue performance in Search.<\/p>

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.<\/p>

It will also reflect higher expenses associated with the Pixel launch due to the pull forward. So those are important factors.<\/p>

I would say overall, company-wide, it’s important to note that we do expect to continue to deliver full-year 2024 Alphabet operating margin expansion relative to 2023, but did want to highlight those important points as we look forward to Q3.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> On the AI Overviews, we’ve rolled it out in the U.S. and we will be, through the course of the year, definitely scaling it up both to more countries and also we’ve taken a conservative start, focused on quality, making sure the metrics are healthy and so on.<\/p>

But you will see us expand the use cases around it, and we’ll touch definitely more queries. All the feedback we have seen is positive.<\/p>

On the monetization side, I think Philipp has touched upon it. Maybe, Philipp, anything more you want to add there?<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yeah, 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.<\/p>

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 U.S. And they will have the opportunity to actually appear within the AI 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.<\/p>

Doug Anmuth (JPMorgan): <\/strong>Thank you. Best of luck, Ruth, in your new role.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> Thank you.<\/p>

Operator: <\/strong>Our next question comes from Michael Nathanson with MoffettNathanson. Please go ahead.<\/p>

Michael Nathanson (MoffettNathanson): <\/strong>Thanks. I have two, one for Sundar and one for Philipp.<\/p>

Sundar, on the 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 your experience in Chrome? And why the company made the decision not to go down the path of deprecating cookies?<\/p>

Philipp, I know it was only one quarter, but it’s interesting that Search is growing faster than YouTube, which surprised some of us. Can you talk about what factors you think are behind the difference between growth rates between these markets? Is there anything on the AI front you can see maybe reaccelerating YouTube growth, as you have seen happen in Search? Thanks so much.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Michael, on cookies, obviously, we are super committed to improving privacy for users in Chrome, and that was the whole focus around Privacy Sandbox, and we remain committed on the journey.<\/p>

But on third-party cookies, given the implications across the ecosystems and considerations and feedback across so many stakeholders, we now believe user choice is the best path forward there. And we’ll both improve privacy, by giving users choice, and we will continue our investments in privacy-enhancing technologies. But it’s obviously an area we will be taking feedback from the players in the ecosystem. And we are committed to being privacy-first as well.<\/p>

Philipp?<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> On the second part of your question, maybe, Ruth, you want to jump in first and then I take the rest if needed?<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> Absolutely.<\/p>

Look, as we both noted, Search revenues really reflected broad-based growth across verticals. That was led by Retail, followed by Financial Services.<\/p>

I think your question really goes to the heart of the year-on-year growth comparison. And as both Philipp and I noted, we are really pleased with YouTube, the YouTube team, all that was done, it was driven by brand, followed by direct response. And they have very strong ongoing operating metrics, which Philipp will comment on.<\/p>

I think the important point to note, and I tried to tease out in opening comments, was that the deceleration in this year-on-year revenue growth for the second quarter versus the first quarter primarily reflected the tougher comparison versus the first quarter. Because at that point, as you probably recall, YouTube was lapping negative year-on-year growth in Q1 last year. And then also Q1 benefited from the extra day from leap year. And so what you’re also seeing here is, with YouTube, we were anniversarying the ramp in APAC-based retailers that began in the second quarter last year and foreign exchange headwinds as well that we noted.<\/p>

And so there’s some timing issues going on, and what we’re trying to highlight is the underlying operating strength.<\/p>

Back to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>Yeah, that was very comprehensive. Nothing really to add from my side here.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>The only thing I would say to Brian’s first question on areas where things are maybe taking longer, I think look, we are all building multimodal models. At least Gemini has been natively multimodal from the ground up. But most of the use cases today that have been unlocked have been around the text side.<\/p>

So in terms of getting real generative audio, video experiences working well, I think it’s going to take some time. But over time, obviously, it will be deeply relevant to YouTube.and so it’s an area I’m excited about in the future.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Thanks, all. Best to you, Ruth.<\/p>

Operator:<\/strong> Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>

Eric Sheridan (Goldman Sachs): <\/strong>Thanks so much. And I’ll echo the thanks for Ruth for all the insights and partnership over the years on these earnings calls.<\/p>

Sundar, maybe first for you. In terms of Cloud and bringing AI to the enterprise, wanted to know if you would go a little bit deeper in terms of how you’re seeing AI actually get adopted and 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?<\/p>

And then following up, the last set of the questions on YouTube were 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.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Eric.<\/p>

Look, on the Cloud and AI stuff, obviously, it’s something which I think will end up being a big driver over time. I mentioned in my opening remarks already, if you take a look at our AI Infrastructure and Generative AI Solutions for Cloud, across everything we do, be it compute on the AI side, the products we have through Vertex AI, Gemini for Workspace, and Gemini for Google Cloud, et cetera, we definitely are seeing traction.<\/p>

People are deeply engaging with the Gemini models across Vertex and AI Studio. We now have over 2 million developers playing around with these things.<\/p>

You are definitely seeing early use cases. But I think we are in this phase where we have to deeply work and make sure on these use cases, on these workflows, we are driving deeper progress and unlocking value, which I’m very bullish will happen. But these things take time.<\/p>

But if I were to take a longer-term outlook, I definitely see a big opportunity here. And I think particularly for us, given the extent to which we are investing in AI, our research and infrastructure leadership, all of that translates directly. And so I’m pretty excited about the opportunity space ahead.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google:<\/strong> And then on your second question, with respect to the subscriptions, 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.<\/p>

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.<\/p>

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 takeup in it, strong subscriber growth. Really pleased with it.<\/p>

We did note that growth on that line decelerated due to anniversarying this YouTube TV price increase. But at the heart of it are people interested in the subscription offerings, and it’s a takeup that’s significant. We are really pleased with it.<\/p>

Eric Sheridan (Goldman Sachs): <\/strong>Thank you.<\/p>

Operator: <\/strong>Our next question comes from Ross Sandler with Barclays. Your line is now open.<\/p>

Ross Sandler (Barclays):<\/strong> Hi, everybody. Just two questions on the AI CapEx.<\/p>

So it looks like, from the outside at least, that the hyperscaler industry going from kind of an underbuilt situation this time last year to better meeting the demand with capacity right now to potentially being overbuilt next year if these CapEx growth rates keep up. So do you think that’s a fair characterization? And how are we thinking about the return on invested capital with this AI CapEx cycle?<\/p>

And then related to that, do you think that the AI industry is close to or far away from hitting some kind of wall on foundation-model improvement in AI training based on lack of availability of new data to train on? Just your thoughts on that would be great. Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thanks, Ross. Great questions.<\/p>

Look, 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, 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. It is definitely something that for us makes sense to lean in.<\/p>

The one way I think about it is when you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here. Even in scenarios where if it turns out we are overinvesting, 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.<\/p>

But I think not investing to be at the front here, I think, definitely has much more significant downsides.<\/p>

Having said that, we obsess around every dollar we put in. Our teams 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.<\/p>

To your second question on how did the scaling laws hold, are we hitting on some kind of wall or something? Look, I think we are all pushing very hard and there’s going to be a few efforts which will scale up on the compute side and push the boundaries of these models.<\/p>

What I would tell is, regardless of how that plays out, I still think there is enough optimizations we’re all doing which is driving constant progress in terms of the capabilities of the models.<\/p>

And more importantly, taking them and translating them into real use cases across the consumer and enterprise side. I think on that frontier, I think there’s still a lot of progress to be had. And so we are pretty focused on that as well.<\/p>

Ross Sandler (Barclays): <\/strong>Thank you.<\/p>

Operator:<\/strong> Our next question comes from Stephen Ju with UBS. Your line is now open.<\/p>

Stephen Ju (UBS):<\/strong> Okay. Thank you so much.<\/p>

Sundar, I guess to ask the AI question a different way, as we talk to some of the model builders out there, it looks like the initial use cases are more on the cost savings or efficiency side. But when do you think we’ll start thinking about products that can help revenue generation for the Fortune 500, Fortune 1000 companies, which is probably something that can, hopefully, create greater value over time, versus just cutting costs?<\/p>

And, Philipp, listening to what will be, I guess, Ruth’s final comments on YouTube on these public calls -- and thank you, by the way, Ruth, for all the help.<\/p>

I couldn’t help but notice that the bigger factors were brand followed by direct response. And if we continue to think that the one you bring up first is the larger factor, and tying this into your prior commentary about Shopping being an important consideration, when do you think we’ll start talking about direct response being a much bigger contributor to YouTube’s growth versus brand? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>To the first part of the question, look, I think the technology is horizontal enough, it can apply on both sides. If you take a use case like improving the customer service experience, there’s a 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 eCommerce player, et cetera. So we are seeing people experiment across both sides. And so I think you will see it layered across both sides.<\/p>

Philipp, on the second one?<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yes, on the second one, look on the direct response side, as you know, it’s about driving and converting commercial intent. Customers are obviously benefiting from including video in their AI-powered campaigns. Could be PMax. Could be Demand Gen. And obviously using our automated tools to enhance and create video creatives and we are very, very optimistic about this path.<\/p>

On average, advertisers who run both image and video ads with Demand Gen campaign see 6% more conversions per dollar than those running image-only ads on Discovery. And this is just one little example of how this can, obviously, boost your performance business, so that’s a big part.<\/p>

The brand side, as you know, Google AI continues to make it easier for brands to show up next to the content where viewers are obviously the most engaged. And they’re finding it, as you can see from the numbers, a very effective way to drive awareness and consideration.<\/p>

We’re also quite excited about some of the recent launches on the YouTube Shopping side, if you want to put that into the direct response bucket.<\/p>

Stephen Ju (UBS):<\/strong> Thank you.<\/p>

Operator:<\/strong> And our last question comes from Justin Post with Bank of America. Your line is now open.<\/p>

Justin Post (Bank of America): <\/strong>Great. I’d like to ask about 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?<\/p>

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.<\/p>

Ruth Porat, President and Chief Investment Officer; CFO, Alphabet and Google: <\/strong>Great. Thank you for that.<\/p>

So overall, as both Sundar and I said, we are very pleased with the results in Cloud. And there is clearly a benefit as the Cloud team is engaging broadly with customers around the globe with AI-related solutions, AI Infrastructure solutions and the Generative AI Solutions.<\/p>

I think we noted that we’re particularly encouraged that the majority of our top 100 customers are already using our Generative AI Solutions. So it is clearly adding to the strength of the business on top of all that they’re doing. And just to be really clear, the results for GCP, the growth rate for GCP, is above the growth for Cloud overall.<\/p>

And then I will turn to Sundar on the cost-saving point.<\/p>

But just one point, we are really pleased as well that Cloud’s margin improved as it did, and in part that reflects the revenue strength that they delivered and all of the efficiency efforts that I’ve already spoken about.<\/p>

But looking ahead in Q3, we do expect the same seasonal pattern that you saw last year with respect to margin, and we are continuing to invest in the business.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> 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 productive engineers and demanding engineers out there and they are definitely kicking the tires hard.<\/p>

But I would say it’s still all in very early stages, particularly when it comes to writing high-quality secure code.<\/p>

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.<\/p>

Justin Post (Bank of America):<\/strong> Great. Thank you.<\/p>

Operator:<\/strong> Thank you. 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.<\/p>

Jim Friedland, Director Investor Relations: <\/strong>Thanks, everyone, for joining us today. We look forward to speaking with you again on our third quarter 2024 call. Thank you and have a good evening.<\/p>

Operator: <\/strong>Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.<\/p>","DocumentFileSize":null,"DocumentFileType":null,"DocumentPath":null,"EventId":925,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"2dbd3c38-5e66-41ea-bc86-319110d99ef4","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2024\/2024-Q2-Earnings-Call\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"6e922611-cd26-47c3-a45c-4cb5e33013a5","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"Q2","ReportYear":"2024","RevisionNumber":42511,"SeoName":"2024-Q2-Earnings-Call","TagsList":null,"TimeZone":"PT","Title":"2024 Q2 Earnings Call","WebCastLink":"","WorkflowId":"9a956a94-53c7-40d0-89e0-f35716b6d6b3","EndDate":"07\/23\/2024 14:30:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"07\/23\/2024 13:30:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"2024 Q3 Earnings Call","Type":"Video","Url":"https:\/\/www.youtube.com\/embed\/wjkf4t8BfLM?enablejsapi=1"}],"Body":"

Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/p>

This transcript is provided for the convenience of investors only, for a full recording please see the <\/i>Q3 2024 Earnings Call webcast<\/u><\/i><\/a>. <\/i><\/p>

Operator:<\/strong> Welcome, everyone. Thank you for standing by for the Alphabet Third Quarter 2024 Earnings conference call.<\/p>

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/p>

I would now like to hand the conference over to your speaker today, Jim Friedland, Senior Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Senior Director Investor Relations:<\/strong> Thank you. Good afternoon, everyone, and welcome to Alphabet’s Third Quarter 2024 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi.<\/p>

Now I’ll quickly cover the Safe Harbor.<\/p>

Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligations to update any forward-looking statement.<\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>

Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>

And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thank you, Jim. And hello, everyone.<\/p>

Q3 was another great quarter. The momentum across the company is extraordinary, as you have seen in recent product launches, and as you will hear on the call today. Our commitment to innovation, as well as our long-term focus and investment in AI, are paying off and driving success for the company and for our customers.<\/p>

We are uniquely positioned to lead in the era of AI because of our differentiated full stack approach to AI innovation, and we’re now seeing this operate at scale. It has three components:<\/p>

First, a robust AI infrastructure that includes data centers, chips and a global fiber network.<\/p>

Second, world class research teams who are advancing our work with deep, technical AI research, and who are also building the models that power our efforts.<\/p>

And third, a broad global reach through products and platforms that touch billions of people and customers around the world, creating a virtuous cycle.<\/p>

Let me quickly touch on each of these.<\/p>

We continue to invest in state-of-the-art infrastructure to support our AI efforts, from the U.S. to Thailand to Uruguay. We’re also making bold clean energy investments, including the world’s first corporate agreement to purchase nuclear energy from multiple small modular reactors, which will enable up to five hundred megawatts of new 24\/7 carbon-free power.<\/p>

We’re also doing important work inside our data centers to drive efficiencies, while making significant hardware and model improvements.<\/p>

For example, we shared that since we first began testing AI Overviews, we’ve lowered machine costs per query significantly. In eighteen months, we reduced costs by more than 90% for these queries through hardware, engineering, and technical breakthroughs, while doubling the size of our custom Gemini model.<\/p>

And of course, we use, and offer our customers, a range of AI accelerator options, including multiple classes of NVIDIA GPUs and our own custom-built TPUs. We’re now on the sixth generation of TPUs, known as Trillium, and continue to drive efficiencies and better performance with them.<\/p>

Turning to research, our team at Google DeepMind continues to drive our leadership.<\/p>

Let me take a moment to congratulate Demis Hassabis and John Jumper on winning the Nobel Prize in Chemistry for their work on AlphaFold. This is an extraordinary achievement and underscores the incredible talent we have, and how critical our world-leading research is to the modern AI revolution, and to our future progress. Also, congratulations to Geoff Hinton, who spent over a decade here, on winning the Nobel Prize in Physics.<\/p>

Our research teams also drive our industry-leading Gemini model capabilities, including long-context understanding, multimodality, and agentive capabilities. By any measure - token volume, API calls, consumer usage, business adoption - usage of the Gemini models is in a period of dramatic growth. And our teams are actively working on performance improvements and new capabilities for our range of models. Stay tuned!<\/p>

And they’re building out experiences where AI can see and reason about the world around you. Project Astra is a glimpse of that future. We’re working to ship experiences like this as early as 2025.<\/p>

We then work to bring those advances to consumers and businesses.<\/p>

Today, all seven of our products and platforms with more than two billion monthly users use Gemini models. That includes the latest product to surpass the two billion user milestone, Google Maps.<\/p>

Beyond Google’s own platforms, following strong demand, we’re making Gemini even more broadly available to developers. Today we shared that Gemini is now available on GitHub Copilot, with more to come.<\/p>

To support our investments across these three pillars, we are organizing the company to operate with speed and agility.<\/p>

We recently moved the Gemini app team to Google DeepMind to speed up deployment of new models, and streamline post-training work.<\/p>

This follows other structural changes that have unified teams in research, machine learning infrastructure and our developer teams, as well as our security efforts and our Platforms and Devices team. This is all helping us move faster.<\/p>

For instance, it was a small, dedicated team that built NotebookLM, an incredibly popular product that has so much promise.<\/p>

We’re also using AI internally to improve our coding processes, which is boosting productivity and efficiency.<\/p>

Today, more than a quarter of all new code at Google is generated by AI, then reviewed and accepted by engineers. This helps our engineers do more and move faster.<\/p>

I am energized by our progress, and the opportunities ahead. And we continue to be laser-focused on building great products.<\/p>

Let me turn now to the quarterly highlights.<\/p>

In Search, recent advancements, including AI Overviews, Circle to Search, and new features in Lens, are transforming the user experience, expanding what people can search for and how they search for it. This leads to users coming to Search more often for more of their information needs, driving additional search queries.<\/p>

Just this week, AI Overviews started rolling out to more than a hundred new countries and territories. It will now reach more than one billion users on a monthly basis.<\/p>

We’re seeing strong engagement, which is increasing overall search usage and user satisfaction. People are asking longer and more complex questions, and exploring a wider range of websites. What’s particularly exciting is that this growth actually increases over time, as people learn that Google can answer more of their questions.<\/p>

The integration of ads within AI Overviews is also performing well, helping people connect with businesses as they search.<\/p>

Circle to Search is now available on over 150 million Android devices, with people using it to shop, translate text, and learn more about the world around them. A third of the people who have tried Circle to Search now use it weekly, a testament to its helpfulness and potential.<\/p>

Meanwhile, Lens is now used for over 20 billion visual searches per month. Lens is one of the fastest-growing query types we see on Search, because of its ability to answer complex, multimodal questions, and help in product discovery and shopping.<\/p>

For all these AI features, it’s just the beginning, and you’ll see a rapid pace of innovation and progress here.<\/p>

Next, Google Cloud.<\/p>

I’m very pleased with our growth. This business has real momentum, and the overall opportunity is increasing as customers embrace GenAI.<\/p>

We generated Q3 revenues of $11.4 billion, up 35% over last year, with operating margins of 17%.<\/p>

Our technology leadership and AI portfolio are helping us attract new customers, win larger deals, and drive 30% deeper product adoption with existing customers.<\/p>

Customers are using our products in five different ways.<\/p>

First, our AI Infrastructure, which we differentiate with leading performance, driven by storage, compute and software advances, as well as leading reliability and a leading number of accelerators. Using a combination of our TPUs and GPUs, LG AI Research reduced inference processing time for its multimodal model by more than 50% and operating costs by 72%.<\/p>

Second, our enterprise AI platform, Vertex, is used to build and customize the best foundation models from Google and the industry. Gemini API calls have grown nearly 14x in a six-month period. When Snap was looking to power more innovative experiences within their ‘My AI’ chatbot, they chose Gemini’s strong multimodal capabilities. Since then, Snap saw over 2.5 times as much engagement with My AI in the United States.<\/p>

Third, customers use our AI platform together with our data platform, BigQuery, because we analyze multi-modal data, no matter where it is stored, with ultra-low latency access to Gemini. This enables accurate, real-time decision making for customers like Hiscox, one of the flagship syndicates in Lloyd’s of London, which reduced the time it took to quote complex risks, from days to minutes. These types of customer outcomes, which combine AI with Data Science, have led to 80% growth in BigQuery ML operations over a six-month period.<\/p>

Fourth, our AI-powered cybersecurity solutions, Google Threat Intelligence and Security Operations, are helping customers, like BBVA and Deloitte, prevent, detect, and respond to cybersecurity threats much faster. We have seen customer adoption of our Mandiant-powered threat detection increase 4X over the last six quarters.<\/p>

Fifth, in Q3, we broadened our applications portfolio with the introduction of our new Customer Engagement Suite. It’s designed to improve the customer experience online and in mobile apps, as well as in call centers, retail stores, and more. A great example is Volkswagen of America, who is using this technology to power its new myVW Virtual Assistant.<\/p>

In addition, the employee agents we deliver through Gemini for Google Workspace are getting superb reviews. 75% of daily users say it improves the quality of their work.<\/p>

Moving now to YouTube.<\/p>

For the first time ever, YouTube’s combined ad and subscription revenue over the past four quarters has surpassed $50 billion.<\/p>

Together, YouTube TV, NFL Sunday Ticket, and YouTube Music Premium are driving subscription growth for the platform. And we’re leaning into the living room experience with multiview, and a new option for creators to organize content into episodes and seasons, similar to traditional TV.<\/p>

At Made On YouTube, we announced that Google DeepMind’s most capable model for video generation, Veo, is coming to YouTube Shorts to help creators later this year.<\/p>

Next, Platforms and Devices.<\/p>

Gemini’s deep integration is improving Android. For example, Gemini Live lets you have free-flowing conversations with Gemini; people love it.<\/p>

It’s available on Android, including Samsung Galaxy devices. We continue to work closely with them to deliver innovations across their newest devices, with much more to come.<\/p>

At Made by Google, we unveiled our latest Pixel 9 series of devices, featuring advanced AI models, including Gemini Nano.<\/p>

We’ve seen strong demand for these devices, and they have already received multiple awards.<\/p>

Turning to Other Bets, I want to highlight Waymo, the biggest part of our portfolio.<\/p>

Waymo is now a clear technical leader within the autonomous vehicle industry and creating a growing commercial opportunity.<\/p>

Over the years, Waymo has been infusing cutting-edge AI into its work. Now, each week, Waymo is driving more than one million fully autonomous miles, and serves over one hundred and fifty thousand paid rides -- the first time any AV company has reached this kind of mainstream use.<\/p>

Through its expanded network and operations partnership with Uber in Austin and Atlanta, plus a new multiyear partnership with Hyundai, Waymo will bring fully autonomous driving to more people and places.<\/p>

By developing a universal driver, Waymo has multiple paths to market. And with its sixth-generation system, Waymo has significantly reduced unit costs without compromising safety.<\/p>

Before I close, I’m delighted to welcome our new CFO, Anat. We’re thrilled to have her on board, and you will hear from her shortly.<\/p>

And as always, I want to express my gratitude to our employees worldwide. Your dedication and hard work have made this another exceptional quarter for Alphabet.<\/p>

Now, over to you, Philipp.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar. And hello, everyone.<\/p>

I’ll start with performance for the quarter and then describe the progress we are seeing across Ads, YouTube and Partnerships, highlighting the impact AI is already having on our business.<\/p>

Google Services delivered revenues of $76.5 billion for the quarter, up 13% year-on-year.<\/p>

Search & Other revenues grew 12% year-on-year, led by growth in the Financial Services vertical due to strength in Insurance, followed by Retail.<\/p>

YouTube Ads revenues grew 12% year-on-year, driven by brand, closely followed by direct response.<\/p>

Network revenues were down 2% year-on-year.<\/p>

In Subscriptions, Platforms and Devices, year-on-year revenues were up 28%, driven by growth in subscriptions as well as the launch of our Made by Google devices in the third quarter.<\/p>

Before I double-click into Ads, YouTube, and Partnerships, a few comments on Search.<\/p>

Whether using their voice to find answers on the go, or opening their camera to explore the world around them, people are expanding how they ask questions in Search, as well as the type of questions they ask. New behaviors create new opportunities to help us connect businesses and consumers via amazing commercial experiences.<\/p>

As GenAI expands what’s possible, we continue to see a significant opportunity in Search. Let me take a minute to explain why.<\/p>

AI really supercharges Search. Our new AI-powered features make searches more helpful, and we continue to see great feedback, particularly from younger users. For example, with Circle to Search where we see higher engagement from users aged 18 to 24.<\/p>

AI is expanding our ability to understand intent and connect it to our advertisers. This allows us to connect highly relevant users with the most helpful ad, and deliver business impact to our customers.<\/p>

Let me share two new ad experiences we have rolled out alongside our popular AI-powered features in Search.<\/p>

First, as you heard from Sundar, every month Lens is used for almost 20 billion visual searches, with one in four of these searches having commercial intent.<\/p>

In early October, we announced product search on Google Lens, and in testing this feature, we’ve found that shoppers are more likely to engage with content in this new format.<\/p>

We’re also seeing that people are turning to Lens more often to run complex multimodal queries, voicing a question, or inputting text in addition to a visual.<\/p>

Given these new user behaviors, earlier this month we announced the rollout of Shopping Ads above and alongside relevant Lens visual search results to help better connect consumers and businesses.<\/p>

Second, AI Overviews, where we have now started showing Search and Shopping ads within the overview for mobile users in the U.S.<\/p>

As you remember, we’ve already been running ads above and below AI Overviews. We’re now seeing that people find ads directly within AI Overviews helpful because they can quickly connect with relevant businesses, products and services to take the next step at the exact moment they need.<\/p>

As I’ve said before, we believe AI will revolutionize every part of the marketing value chain.<\/p>

Let’s start with Creative. Advertisers now use our Gemini-powered tools to build and test a larger variety of relevant creatives at scale.<\/p>

Audi used our AI tools to generate multiple video, image and text assets in different lengths and orientations out of existing long-form videos. It then fed the newly-generated creatives into DemandGen to drive reach, traffic and booking to their Driving Experience. The campaign increased website visits by 80% and increased clicks by 2.7 times, delivering a lift in their sales.<\/p>

Last week, we updated image generation in Google Ads with our most advanced text-to-image model, Imagen 3, which we’ve tuned using ads performance data from multiple industries, to help customers produce high-quality imagery for their campaigns. Advertisers can now create even higher-performing assets for PMax, DemandGen, App, and Display campaigns.<\/p>

Turning to Media Buying. AI-powered campaigns help advertisers get faster feedback on what creatives work where, and redirect their media buying.<\/p>

Using DemandGen, DoorDash tested a mix of image and video assets to drive more impact across Google and YouTube’s visually immersive surfaces. They saw a 15 times higher conversion rate at a 50% more efficient cost per action when compared to Video Action Campaigns alone.<\/p>

Last and most importantly, Measurement. This quarter we extended availability of our open source marketing mix model “Meridian” to more customers, helping to scale measurement of cross-channel budgets to drive better business outcomes.<\/p>

On YouTube, we remain focused on building a platform that enables creators to thrive and unlocking a whole new world of creativity with AI. Creators are at the heart of the YouTube ecosystem, and the content they are making is driving robust growth in watchtime across the platform.<\/p>

We are also using AI to greatly improve recommendations on YouTube. Driven by Gemini, our large language models have a deeper understanding of video content and viewers’ preferences; as a result, they can recommend more relevant, fresher, and personalized content to the viewer.<\/p>

Short-form creation continues to thrive on YouTube. Shorts monetization improved again this quarter, and we continued to significantly close the gap with in-stream video, particularly in the U.S. and other more highly monetizing markets.<\/p>

Of all the channels uploading to YouTube each month, 70% are uploading Shorts. And we recently announced a top-requested feature, the ability to upload Shorts up to three-minutes long. Also, advertisers can now book First Position on Shorts blocks in close to 40 markets.<\/p>

We’re unlocking more opportunities in the living room. Our momentum here continues as we maintain our status as the number one streamer in the U.S., according to Nielsen.<\/p>

This is driven by the strength of our creators, such as Michelle Khare and Rhett & Link, who are increasingly crafting experiences designed specifically for the big screen. And it’s paying off. The number of creators making the majority of their YouTube revenue on TV screens is up more than 30% year-on-year.<\/p>

YouTube is becoming a premier destination for sports watching. People come for the game and stay for the commentary and around-the-game content from creators like Evelyn Gonzalez, Adam W. and Brett Kollman.<\/p>

During the Olympics, content from Paris 2024 had over 12 billion views on YouTube. More than 850 million unique viewers watched over 40 billion minutes of content, with 35% on their TV screens.<\/p>

And recently we kicked off our second season of NFL Sunday Ticket on YouTube TV, which continues to receive a positive reception from advertisers, our partners at the NFL, and fans. We have continued to invest in our product experience, with improvements to Multiview and deeper integrations for fantasy football fans.<\/p>

Following up on my remarks from last quarter about Brandcast, we had a strong Upfront performance, with commitments up about 20% year-on-year.<\/p>

As always, let me wrap with the strong momentum we are seeing in Partnerships. More and more of our partners are recognizing the breadth of our technologies and building solutions that leverage the very best of Google.<\/p>

For example, our recently announced strategic partnership with Vodafone Group spans Google Cloud, AI, Android, ads and digital services. This multi-billion dollar partnership will bring these technologies to more than 330 million customers across Europe and Africa. We’re collaborating on more than 30 initiatives across seven areas, including generative AI for consumers, a best-in-class TV platform, hardware and cybersecurity.<\/p>

With that, a heartfelt “Thank You” to Googlers everywhere for their extraordinary commitment, and to our customers and partners for their continued collaboration and trust.<\/p>

Anat, welcome to the team! It’s great to have you with us. Over to you!<\/p>

Anat Ashkenazi, SVP & CFO, Alphabet and Google:<\/strong> Thank you, Philipp. And thanks, Sundar, for the words of welcome.<\/p>

My comments will focus on year-over-year comparisons for the third quarter, unless I state otherwise.<\/p>

I will start with the results at the Alphabet level and will then cover our segment results. I’ll end with high-level commentary on investment at the Alphabet level.<\/p>

We had another strong quarter in Q3 with robust momentum across the business. Consolidated Revenue increased by 15%, or 16% in constant currency. Search remained the largest contributor to revenue growth, followed by robust 35% growth in Cloud.<\/p>

Total Cost of Revenue was $36.5 billion, up 10%.<\/p>

TAC was $13.7 billion, up 9%. We continue to see a revenue mix shift, with Google Search growing at double-digit levels, while Network revenue, which have a much higher TAC rate, declined.<\/p>

Other Cost of Revenue was $22.8 billion, up 11%, with the increase primarily driven by; content acquisition costs primarily for YouTube, an increase in depreciation associated with higher level of investment in our Technical Infrastructure, and higher hardware cost associated with the pull forward of our Made by Google launches from the fourth to the third quarter.<\/p>

Total operating expenses increased 5% to $23.3 billion. The increase was primarily driven by facilities related charges, as a result of action we’re taking to further optimize our office space footprint globally, followed by depreciation, partially offset by a year-on-year decline in charges for Legal and other matters.<\/p>

R&D investments increased by 11%, primarily driven by increases in compensation and depreciation expenses.<\/p>

Sales and Marketing expenses increased 5%, primarily reflecting investment in advertising and promotional efforts related to the Made by Google launches, as well as for AI and Gemini.<\/p>

G&A expenses declined by 10%, primarily due to lower charges for legal and other matters.<\/p>

Operating income increased 34% to $28.5 billion, and operating margin increased to 32%.<\/p>

Net income increased 34% to $26.3 billion, and earnings per share increased 37% to $2.12.<\/p>

We’re pleased with the progress we’re making in re-engineering our cost structure, which is reflected in our operating margin expansion this quarter, while also continuing to invest in the business to bring innovation to consumers, creators and enterprises.<\/p>

We delivered free cash flow of $17.6 billion for the third quarter and $55.8 billion for the trailing twelve months.<\/p>

Year-on-year, free cash flow was negatively impacted by the following items - In 2023, we deferred cash tax payments from the second and third quarter to the fourth quarter; and in Q3 2024, we made a $3 billion cash payment related to a 2017 EC shopping fine.<\/p>

We ended the quarter with $93 billion in cash and marketable securities.<\/p>

Now turning to segment results. Google Services revenue increased 13% to $76.5 billion.<\/p>

Google Search & Other Advertising revenue increased by 12% to $49.4 billion.<\/p>

The robust performance of Search was broad-based across verticals, led by the Financial Services vertical, due to strength in Insurance, followed by Retail.<\/p>

YouTube advertising revenue increased 12% to $8.9 billion, driven by brand, followed by direct response advertising.<\/p>

As Philipp mentioned, we’re seeing strong momentum in YouTube, including robust growth in watchtime across the platform, and are excited about the new features and products we’re bringing to creators.<\/p>

Network advertising revenue of $7.5 billion were down 2%.<\/p>

In the third quarter, the year-on-year growth in all our advertising revenue lines was impacted by the increasing strength in advertising revenue in Q3 of last year, in part from APAC-based retailers.<\/p>

Subscriptions, Platforms and Devices revenue increased 28% to $10.7 billion, reflecting growth in subscription revenues as well as the launch of our Made by Google devices in the third quarter.<\/p>

We continue to have significant growth in our subscription products, driven primarily by YouTube TV and YouTube Music Premium, as well as Google One, primarily due to increases in the number of paid subscribers.<\/p>

With regards to Platforms, we’re pleased with the performance in Play, primarily driven by an increase in buyers.<\/p>

Google Services Operating income increased by 29% to $30.9 billion, and operating margin was 40%.<\/p>

Turning to the Google Cloud segment, which continued to deliver very strong results this quarter. Revenue increased by 35% to $11.4 billion in the third quarter, reflecting accelerated growth in GCP across AI infrastructure, Generative AI Solutions and core GCP products. Once again, GCP grew at a rate that was higher than Cloud overall.<\/p>

We also saw strong Google Workspace growth, primarily driven by increases in average revenue per seat.<\/p>

As you just heard from Sundar, the robust innovation [and] expanded AI offerings within our Cloud business are allowing existing and new customers to realize measurable business benefits, including reduced costs, greater customer engagement, faster response time and better revenue conversion.<\/p>

Google Cloud operating income increased to $1.9 billion, and operating margin increased to 17%. The operating margin expansion was driven by strong revenue performance across Cloud AI products, core GCP and Workspace, as well as ongoing efficiency initiatives.<\/p>

As to our Other Bets, for the third quarter, revenues were $388 million, and operating loss was $1.1 billion. I’ll highlight just a couple of accomplishments in the quarter for Waymo and Wing.<\/p>

We’re excited about the progress we are seeing in Waymo, as Sundar mentioned, and the increase in the number of paid rides. We are planning to continue to expand our geographic coverage and reach more customers in existing markets and new markets.<\/p>

Wing, our drone delivery company, recently passed the one year anniversary of scaling its partnership with Walmart in the Dallas-Fort Worth area, now operating in 11 stores and serving 26 different cities and towns.<\/p>

Turning to Alphabet-level activities, the largest component of this line is our investment in AI research and development activities which support all of Alphabet.<\/p>

There were two notable items that impacted the operating loss in Alphabet-level activities. First, a $607 million charge related to decisions we’ve made to further optimize our physical footprint and office space globally. And, second, our ongoing investments in AI R&D, including the full quarter effect of the organizational changes we’ve made in May to move some additional AI teams from Google Services to Google DeepMind.<\/p>

With respect to CapEx, our reported CapEx in the third quarter was $13 billion, reflecting investment in our Technical Infrastructure with the largest component being investment in servers, followed by data centers and networking equipment.<\/p>

Looking ahead, we expect quarterly CapEx in the fourth quarter to be at similar levels to Q3, keeping in mind that the timing of cash payments can cause variability in quarterly reported CapEx.<\/p>

Our expansion of data center capacity is expected to bring economic benefits to countries and communities where we are investing. In the third quarter alone, we made announcements of over $7 billion in planned data center investments, with nearly $6 billion of that in the U.S.<\/p>

In Q3, we also returned value to shareholders in the form of $15.3 billion in share repurchases and $2.5 billion in dividend payments.<\/p>

Overall, we return a total of nearly $70 billion over the trailing twelve months to shareholders.<\/p>

As we look forward, we are working to balance our investments in AI and other growth areas with the cost discipline needed to fund those activities.<\/p>

As we think about the remainder of 2024, there are a couple of dynamics to consider. In terms of revenue, year-on-year growth in advertising revenue will continue to be impacted by the increasing strength in advertising revenue in the second half of 2023, in part from APAC-based retailers.<\/p>

And there will be a headwind to year-over-year growth in Subscriptions, Platforms and Devices revenue in the fourth quarter due to the pull forward of our Made by Google launches into the third quarter this year.<\/p>

In terms of expenses, we’ll continue to see increases in depreciation and expenses associated with higher level of investment in our Technical Infrastructure, partially offset by a slight benefit from the cost [of] revenues associated with our devices due to the pull forward of hardware launches into Q3.<\/p>

Now, before I go into Q&A, as the new CFO, I would like to share a few thoughts on how I am approaching and thinking through growth, cost structure and capital allocation, and expect to hear more from me on these topics in the coming quarters.<\/p>

As I look at the business, I see opportunities for further growth, propelled by AI, and the underlying momentum across the business. You heard about some of these on the call today.<\/p>

I also believe that we are well positioned to deliver meaningful innovation, which will translate to revenue, given our strength in the core pillars that are required to succeed in AI at scale.<\/p>

Realizing those opportunities and great innovation in AI requires global reach, which we have through our products and platforms, as well as continued meaningful capital investment. And while we have a strong balance sheet to be able to support these investments, we will be looking for efficiencies so that we can fund innovation in priority areas.<\/p>

Sundar, Ruth, and our leadership team started important work to re-engineer our cost structure, including efforts such as optimizing our headcount growth, our physical footprint, improving the efficiency of our Technical Infrastructure, and streamlining operations across the company through the use of AI.<\/p>

I plan to build on these efforts but also evaluate where we might be able to accelerate work and where we might need to pivot to free up capital for more attractive opportunities.<\/p>

Thank you. Sundar, Philipp, and I will now take your questions.<\/p>

Operator: <\/strong>Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>

And our first question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>

Brian Nowak (Morgan Stanley): <\/strong>Thanks for taking my question. I have a two-parter, Sundar.<\/p>

The first one, over the course of the last year-plus, you sort of showcased a lot of different types of new GenAI-enabled search products to reimagine the search experience. Can you help us hone in on one or two of these products that you’re most excited about, that you think over the next two to three years can really lead to more durable, multi-year search growth once they scale?<\/p>

And then the second one, just as we are sort of thinking through constraints to how quickly they come out, what are sort of the key constraints that you see to really reimagining Search and scaling it out across two to three billion people? Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thanks, Brian. Great question.<\/p>

Look, it’s been an extraordinary year of innovation. I mentioned in my remarks about Circle to Search, Lens now with video search approaching over 20 billion queries a month. Obviously AI Overviews.<\/p>

And with each of these changes, we’re definitely expanding what’s possible in Search. And it’s been really heartening to see users adapt. They understand they can ask more queries, they come back more often. And we’ve seen growth there.<\/p>

While we have rolled out AI Overviews to over a billion users, there’s a lot more innovation there we are actively working on. So I expect Search to continue to evolve significantly in 2025, both in the Search product and in Gemini.<\/p>

And so I think that’s the opportunity ahead. I think we are in the early days of what is a powerful new technology, and with it, I think we can do a lot more for our users. But at the same time, underpin it on the foundational bedrock of quality and trust and user experience, which we’ve always done.<\/p>

So we are at one billion people, I don’t necessarily see a constraint there. Obviously, things like latency, cost per query, et cetera. But you’ve seen us over the past 18 months make substantial progress.<\/p>

So we’ll continue rolling it out more, and we will keep evolving it. I think Search, if I were to take a twelve-month outlook, I think is going to continue to evolve and we’ll be at the forefront of that innovation.<\/p>

Operator:<\/strong> Our next question comes from Doug Anmuth with JPMorgan. Your line is now open.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Hi, thanks for taking the question. Perhaps for Sundar and Anat.<\/p>

Can you talk more about the infrastructure advantages and CapEx efficiencies you generated from Google’s own TPUs? And how does that influence your CapEx spending going forward relative to peers and other leading cloud service providers? Thanks.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Doug. I’ll take the first part, and Anat can give color on the CapEx spending part.<\/p>

Look, I think we are well-positioned because in our AI infrastructure, we have a comprehensive solution set, right. We have all the leading AI accelerators - GPUs, TPUs, as well as CPUs -and we’re investing in all of them.<\/p>

We have a wonderful partnership with NVIDIA. We’re excited for the GB200s, and we’ll be one of the first to provide it at scale.<\/p>

On the TPU front, I think we have - not only are we in our sixth generation - I just spent some time with the teams on the roadmap ahead. I couldn’t be more excited with the forward-looking roadmap, all of it allows us to both plan ahead in the future and really drive an optimized architecture for it.<\/p>

And I think because of all this, both, we can have best-in-class efficiency, not just for internal at Google, but what we can provide through Cloud. And that’s reflected in the growth we saw in our AI infrastructure and GenAI services on top of it.<\/p>

So I’m pretty excited about how we are set up and we’ll continue executing there. And maybe Anat can give comments on the CapEx spending.<\/p>

Anat Ashkenazi, SVP & CFO, Alphabet and Google:<\/strong> Yeah, sure. So let me provide a little more color on our capital investments, and certainly an important area in this time of investments in AI.<\/p>

As you saw in the quarter, we invested $13 billion, CapEx, across the company. And as you think about it, really it’s divided into two categories. One is our Technical Infrastructure, and that’s the majority of that $13 billion. And the other one goes into areas such as facilities, the [Other] Bets, and other areas across the company.<\/p>

Within TI, we have investments in servers, which includes both TPUs and GPUs, and then the second categories are data centers and networking equipment. This quarter, approximately 60% of that investment in technical infrastructure went towards servers and about 40% towards data center and networking equipment.<\/p>

And as you think about them, we offer both GPUs and TPUs, both internally and to our customers so we have choices and options based on what our customer needs and what our internal needs are.<\/p>

And as you think about the next quarter and going into next year, as I’ve mentioned in my prepared remarks, we will be investing in Q4 at approximately the same level of what we’ve invested in Q3, approximately $13 billion.<\/p>

As we think into 2025, we do see an increase coming in 2025. And we will provide more color on that on the Q4 call, likely not the same percent step-up that we saw between ’23 and ’24 but an additional increase.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>The one other thing I would add, Doug, on your first part of the question on the TPUs is if you look at the flash pricing we’ve been able to deliver externally, and how much more attractive it is compared to other models of that capability, I think, probably that gives a good sense of the efficiencies we can generate from our architecture. And we are doing the same for internal use as well.<\/p>

The models for Search, while they keep going up in capability, we have been able to really optimize them for the underlying architecture and that’s where we’re seeing a lot of efficiencies as well.<\/p>

Doug Anmuth (JPMorgan):<\/strong> Thank you.<\/p>

Operator:<\/strong> Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>

Eric Sheridan (Goldman Sachs):<\/strong> Thank you for taking the questions.<\/p>

And, Anat, congrats on the new role, and welcome to Alphabet.<\/p>

Sundar, maybe one for you on Waymo. What are the key learnings as Waymo has rolled out to additional cities, in terms of consumer adoption of the product and how you think about go-to-market strategies for Waymo?<\/p>

And then maybe one for Philipp. In terms of looking at YouTube trends by long-form versus short-form video or Shorts, how are you seeing consumption versus monetization trends continue to evolve for YouTube, as broken down maybe in that means? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thanks, Eric. On Waymo, obviously, it’s been an exciting year, both in the Phoenix market and San Francisco. We’ve definitely scaled and particularly scaled paid rides. And definitely surprised us on the positive in terms of how much consumers are loving the experience from a safety standpoint, privacy standpoint, reliability standpoint, et cetera. So I think all of that has been on the positive side. And obviously, the product will continue to improve.<\/p>

So far, as we have mainly focused on each city as we go, the pace at which we can now do an additional city gets easier so we’re definitely accelerating that way. That’s why you’ve seen us move into L.A.<\/p>

We are also striking partnerships in newer and unique ways, hence the Uber partnership and expansion to Austin and Atlanta. And we have more options where we are looking at the Driven by Waymo model with other network partners, fleet managers, et cetera.<\/p>

So it’s an exciting moment, but we are still obviously being safety focused, but are looking to scale and testing out a variety of models, which will help us plan ahead well for 2025 and beyond.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yes. And to your question on YouTube Shorts, consumption versus monetization, maybe we start with the watchtime. It continues to grow, actually, across YouTube, with particular strength in Shorts and in the living room. Just to give you a number, over 70 billion YouTube Shorts are watched every day.<\/p>

On the monetization side, the monetization rate of Shorts relative to in-stream viewing is continuing to show a healthy rate of growth. The gap continues to narrow, particularly in the U.S. We also see it in other more highly monetizing markets.<\/p>

And we continue to work very closely with our advertisers. We are committed to providing them with very effective ways to reach the growing audience here.<\/p>

I talked about advertisers now being able to book First Position on Shorts blocks. That’s exciting. Shorts are also integrated into video reach campaigns, YouTube Select. You are really giving brands precise targeting options here. We are pleased with the progress we’re making here.<\/p>

Operator:<\/strong> Our next question comes from Ross Sandler with Barclays. Your line is now open.<\/p>

Ross Sandler (Barclays):<\/strong> Hi, everybody. Thanks for taking questions. Congrats, Anat.<\/p>

Two, if that’s okay.<\/p>

So first, Sundar, given the high stakes around native AI product usage, are there any milestones you can share around where Gemini usage is compared to the 250 million weekly active users that ChatGPT is seeing right now?<\/p>

And then the second question is - I’m sure this is something you guys have been thinking about for a while, but it looks like the way that the Google versus DOJ Search trial is going, there’s a decent likelihood that the Apple ISA contract and some of the Android pre-install contracts are going to be voided out at some point in the future.<\/p>

So I guess the question is- What plans do we have in place to recapture some of the usage that might be going away in those Search access points? How can we gain share on iOS queries if the Safari toolbar access point were to change? Thank you very much.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Ross.<\/p>

Look, I think, obviously we are serving Gemini across a lot of touchpoints, including it’s now over a billion people are using it in Search, accessing. We are getting it across our products.<\/p>

The Gemini app itself has very strong momentum on user growth.<\/p>

Our API volume, I commented on Gemini APIs having gone up 14x in the past six months. So we are seeing growth across the board. And the Gemini integration into Google Assistant is going super well on Android. The user feedback is positive, so we are continuing to roll that out more.<\/p>

So I think, you will see us, we are investing in the next generation of models. And as part of that, we are investing in scaling up the usage, both directly to the models, both on the consumer and the developer side. So I think I’m pleased with the momentum there.<\/p>

On the second, on the legal trials, obviously, I don’t want to, it’s not appropriate for me to speculate, given it’s in the middle of ongoing litigation.<\/p>

But what I would say is, stepping back, look we’ve always, and even as the Court acknowledged, clearly we’ve reached a position of success because we have deeply innovated and we are continuing to do so.<\/p>

People have chosen us because they view it as the best product, be it consumers or partners. And we have a long track record of working hard to make sure our products are as easily available to use as possible across all platforms.<\/p>

So all that approach and all the learnings over the years, I think will all be, will give us a strong foundation.<\/p>

First of all, we plan to vigorously defend these cases. And some of the early proposals from the DOJ, et cetera, have been far-reaching. And we plan to, I think they could have unintended consequences, particularly to the dynamic tech sector and the American leadership there. And so we plan to engage very vigorously there. Thanks.<\/p>

Ross Sandler (Barclays): <\/strong>Thank you.<\/p>

Operator: <\/strong>Your next question comes from Justin Post with BAML. Your line is now open.<\/p>

Justin Post (Bank of America):<\/strong> Okay, great. I wanted to ask a little more about AI Overviews. Maybe two parts; You mentioned you are seeing increasing queries or activity. Could you help us understand that for the billion users who have had access to the product, what you’re seeing there?<\/p>

And then on the monetization side, is there a chance that AI Overviews would help monetize some of the information queries that maybe you weren’t making much monetization from with old formats? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Thanks, Justin.<\/p>

Look, I think the main thing I would say is, as we have rolled out, we are obviously now scaling it out - we just rolled it out in a hundred new countries and territories and that’s what will get us to a billion users.<\/p>

But amongst the users where we are already rolled out, we clearly see strong engagement. It’s one of the most positive user satisfaction launches we have done in Search.<\/p>

And it is increasing overall search usage. People are asking more complex questions, different types of questions, they are exploring a wider range of websites. And what’s particularly exciting is that this growth actually increases over time as people learn to adapt to that new behavior.<\/p>

So I’ll stick to those comments. And I think to the second part of your question on the monetization side, I think Philipp can answer more there. Philipp?<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Look, the transition here is working well, including for ads. As you know, we recently launched ads within AI Overviews on mobile in the U.S. and this really builds on our previous rollout of ads above and below the AI Overviews.<\/p>

So overall, for AI Overviews, we see monetization at approximately the same rate, which gives us a really strong base on which we can innovate even more. And specifically to your question of monetizing queries, that we’re weak in monetization potentially at the moment, yes, I can see that there’s an opportunity for that.<\/p>

Justin Post (Bank of America): <\/strong>Thank you.<\/p>

Operator:<\/strong> Your next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.<\/p>

Michael Nathanson (Moffett):<\/strong> Thanks. I have one for Sundar.<\/p>

Sundar, there was this perception, and it may have been false, that Alphabet was not as innovative on AI as it should. And it clearly shows that was wrong, you are moving pretty quickly rolling out new products.<\/p>

Can you talk a bit about how you may have changed your org structure? I know you’ve combined some assets, but talk a bit about how you maybe rethought how you go-to-market with some of your innovation products and maybe what’s changed operationally as AI has picked up steam for you guys?<\/p>

Sundar Pichai, CEO Alphabet and Google: <\/strong>Thanks, Michael.<\/p>

Look, I definitely think it’s an extraordinary opportunity. And I think the company, given the important moment, we had to gear up, to build models from scratch that could be productionized at scale on our architecture, and that’s what the Gemini era was about. So there was a fixed cost of getting it all set up and getting the Gemini era under way.<\/p>

But now I think we are in much more of a virtuous cycle with a lot of velocity in the underlying models. We’ve had two generations of Gemini models. We are working on the third generation, which is progressing well.<\/p>

And teams internally are now set up much better to consume the underlying model innovation and translate that into innovation within their products. So now, all the seven products, which have 2 billion users each, have done their first versions of incorporating Gemini. And there’s an aggressive roadmap ahead for 2025.<\/p>

I mentioned earlier, Search alone, I think there’s a lot more we can do.<\/p>

And we’re also enabling smaller teams to ship newer experiences. And NotebookLM was the first instantiation of those types of efforts as well.<\/p>

Through it all, we had to do this when the company evolved from desktop to mobile. We are restructuring the company. Effectively, if you think of Google as a neural network, we are forming new synapses, which work much better to adapt to this moment and I think that sets us up well for the year ahead.<\/p>

And we are bringing all of this innovation to the outside world through Cloud as well. And so we’re going to do that, so that’s an additional opportunity at this moment.<\/p>

Michael Nathanson (Moffett):<\/strong> Thanks, Sundar.<\/p>

Operator:<\/strong> Our next question comes from Mark Mahaney with Evercore. Your line is now open.<\/p>

Mark Mahaney (Evercore):<\/strong> Okay. I would like to ask two questions, please, to Anat.<\/p>

First, the margins at Cloud really started to ramp nicely. There are comps in the industry with still materially higher operating margins, I imagine that’s a matter of scale and trying to catch up from a third-place position, but how do you think about the margin trends that you’re seeing? And what’s your level of confidence that those margins can kind of match up to other industry players that are doing closer to 30% margins?<\/p>

And then secondly, just across the board when you think about the business that’s running at, what, 32% operating margins this last quarter, and you come in looking at this fresh, is it clear to you that there are a lot of kind of newfound cost efficiencies or ongoing cost efficiencies? Like, what do you see as the biggest opportunities to kind of take those margins and maybe over time take them materially higher? Thank you very much.<\/p>

Anat Ashkenazi, SVP & CFO, Alphabet and Google: <\/strong>Thanks, Mark, for both of these questions. Let me start on the Cloud margin.<\/p>

Certainly, very pleased to see not just the top-line growth rate, but the margin expansion to 17%. Really outstanding work by our Cloud team to drive continued benefit to customers. And as you think about that margin expansion, really, it’s a few things. You’ve mentioned one of them.<\/p>

The first is scale. Obviously, as we scale the business, we have more opportunity for margin expansion.<\/p>

But the second, and it shouldn’t be underestimated, is the work that the team has done to drive efficiencies across the Cloud business. And we’re seeing those come through, whether it’s through headcount management, facilities management, other process efficiencies. We’re seeing that go to the bottom line and driving the results you’re seeing this quarter.<\/p>

Hard to obviously compare to any of our peers or competitors. It’s a different business. But more to come.<\/p>

Now, the one thing to remember, and I mentioned this in my prepared remarks, this is an area that requires investment. And a lot of this investments, if you think about servers, et cetera, is based on demand we’re seeing from customers. So this will translate to revenue in the fairly short term.<\/p>

But that means there are headwinds associated with overall the annual run rate or costs associated with these investments, whether it’s in the form of depreciation or just construction costs that are not capitalized, et cetera.<\/p>

So we will continue to drive efficiency in the business to try and offset some of these. But this is how I’m thinking about the dynamics for Cloud.<\/p>

Overall for the business, this is one of my key priorities, is to look across the organization to see what we can do in terms of driving further efficiencies. There’s really good work that was done, started by Ruth, Sundar, and the rest of the lead team, to re-engineer the cost base. But I think any organization can always push a little further.<\/p>

And I’ll be looking at additional opportunities really across all the elements that I’ve mentioned on my prepared remarks. Think not just about the size of the organization, but mostly how we operate and how we run the business.<\/p>

And I think when you simplify the organization, Sundar just made a few comments on that, when we use AI within our own processes and how we get work done, there are some efficiencies or opportunities for efficiencies.<\/p>

Now all of that will go against substantial increases in capital investment, as I mentioned, going into 2025. Again, I will give more color when we are on the Q4 call. So hopefully, we’ll be able to drive efficiencies to work towards offsetting some or all of that increase.<\/p>

Mark Mahaney (Evercore): <\/strong>Thank you very much.<\/p>

Operator: <\/strong>Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>

Ken Gawrelski (Wells Fargo):<\/strong> Thank you so much. Two, if I may.<\/p>

First, just on Search, why does it make sense to have two completely, or why doesn’t it make sense to have two completely different search experiences? One, an agent-like answers engine and then, two, a links based more traditional search engine? You could innovate on both and let the consumer decide. Maybe think of it as the ultimate A\/B test. So I would be curious to get your thoughts there.<\/p>

And then the second, if you could touch a little bit on the consumer environment in 4Q. Perhaps nobody has a better view into the health of the consumer in multiple verticals.<\/p>

If you could talk a little bit about, you talked about tougher comps on the Asia eCommerce side, but any other trends you could point out, be it around the election or fewer holiday days this year, that would be really helpful. Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> Why don’t I take the first part, and then Philipp can give color on the consumer vertical trends.<\/p>

On the first part, look, in this moment, people are using a lot of buzz words like “answer engines” and all that stuff. I mean, Google started answering questions about ten years ago in our Search product with Featured Snippets.<\/p>

So look, I think ultimately you are serving users. User expectations are constantly evolving. And we work hard to stay a step ahead, anticipate and stay a step ahead. And this is why we kind of really brought multimodality on the input side and the output side in Search pretty natively. And so we’ll continue expanding innovations there.<\/p>

I do think having two surfaces for us allows us to experiment more. I view this moment as a moment in which there are new use cases which we will be able to do, which we couldn’t have done before. And so having the flexibility, having product surfaces where we can move very, very fast, I think is actually helpful.<\/p>

And so we are embracing it and going to lean into this moment like we have done in the past year. And I think that will play out well for users.<\/p>

Philipp?<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> Yes. On the vertical trends, look, I called out Search and Other revenues being led by growth in the Financial Services due to improved economics in the Insurance industry, followed by retail.<\/p>

But I think it’s fair to say in general we saw broad-based strength across all verticals. Maybe specifically, to election-related ad spend, we had a slight tailwind from election-related ad spend in the third quarter, which was a little more pronounced in YouTube ads.<\/p>

Operator:<\/strong> And our last question comes from Stephen Ju with UBS. Your line is now open.<\/p>

Stephen Ju (UBS): <\/strong>Okay. Thank you so much.<\/p>

Hi, Sundar. I think in two separate blog posts from Google Cloud, talking about the real-life use cases for GenAI, I think you highlighted what was a pretty material increase in a number of companies that are starting to turn their, I guess, ideas into products. I think it was, like, an 80% increase in a six-month period.<\/p>

I think you guys also published some survey data saying that your customers are generating tangible ROI there.<\/p>

So can you update us on what you’re seeing in terms of sales cycles perhaps accelerating? And how much of the heavy lifting the Cloud team may have to do to help your customers turn those ideas into reality more quickly?<\/p>

And Philipp, I think one of the feedbacks that we’re getting from advertisers is that while the initial use case for PMax for them was in Search, they’re starting to use it more and more for mid- and upper-funnel campaigns and budgets as well.<\/p>

Can you talk about whether that’s an anecdote or something you are already seeing perpetuate among all of your advertisers? Thank you.<\/p>

Sundar Pichai, CEO Alphabet and Google:<\/strong> On the Cloud side, look, I do think you hinted in your question itself. Definitely customers are leaning in at this moment wherever we have been working.<\/p>

We are definitely seeing real concrete proof points delivering real impact, right, be it in their user experience, be it in the bottom line, et cetera. And so I gave a few examples on my remarks. And I think customers are getting savvier.<\/p>

We ourselves are going through a lot of learnings, both in deploying this within Google as an enterprise and bringing those learnings to our customers outside. And as we see common patterns across the breadth of sectors we serve in, I think we’re bringing those learnings.<\/p>

So I would say, if anything, I think over time, I think organizations are beginning to understand more. They are leaning in. Our models are getting better. We are building more comprehensive solutions on top of it.<\/p>

So I think we are well set up for 2025. And I think there will be continued momentum in this area.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> And on the PMax side, look, we continue to see success with PMax. We see those success stories really from large advertisers, from agencies, from SMBs, across marketing objectives, across different verticals. It’s very cost effective, and it really finds customers wherever they are across all the different Google channels.<\/p>

And with the introduction of Gemini, we added a lot of new features to PMax. For example, deliver more powerful performance, help advertisers scale, build high-quality creative assets and so on.<\/p>

But going directly to your question on the funnel, also keep in mind we have a great product with DemandGen that is all about inspiring consumers beyond the initial awareness and to take action. And we think DemandGen is actually a very powerful tool to win in today’s marketplace with marketers. And we can’t wait to see actually what more value it will drive.<\/p>

Stephen Ju (UBS):<\/strong> Thank you.<\/p>

Operator:<\/strong> 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.<\/p>

Jim Friedland, Senior Director Investor Relations:<\/strong> Thanks, everyone, for joining us today. We look forward to speaking with you again on our Fourth Quarter 2024 call.<\/p>

Thank you and have a good evening.<\/p>

Operator: <\/strong>Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/p>

This transcript is provided for the convenience of investors only, for a full recording please see the <\/i>Q4 2024 Earnings Call webcast<\/u><\/i><\/a>. <\/i><\/p>

Operator: <\/strong>Welcome, everyone. Thank you for standing by for the Alphabet Fourth Quarter and Fiscal Year 2024 Earnings conference call.<\/p>

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/p>

I would now like to hand the conference over to your speaker today, Jim Friedland, Senior Director of Investor Relations. Please go ahead.<\/p>

Jim Friedland, Senior Director, Investor Relations:<\/strong> <\/b>Thank you. Good afternoon, everyone, and welcome to Alphabet’s Fourth Quarter 2024 Earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi.<\/p>

Now I’ll quickly cover the Safe Harbor.<\/p>

Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement.<\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>

Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>

And now I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/b>Thanks, Jim. And hello, everyone.<\/p>

We delivered another strong quarter in Q4, driven by our leadership in AI and our unique full-stack approach.<\/p>

We’re making dramatic progress across compute, model capabilities and in driving efficiencies.<\/p>

We’re rapidly shipping product improvements, and seeing terrific momentum with consumer and developer usage.<\/p>

And we’re pushing the next frontiers, from AI agents, reasoning and deep research, to state-of-the-art video, quantum computing and more.<\/p>

The company is in a great rhythm and cadence - building, testing, and launching products faster than ever before. This is translating into product usage, revenue growth and results.<\/p>

In Search, AI Overviews are now available in more than 100 countries. They continue to drive higher satisfaction and search usage. Meanwhile, Circle to Search is now available on over 200 million Android devices.<\/p>

In Cloud and YouTube, we said at the beginning of 2024 that we expected to exit the year at a combined annual revenue run rate of over $100 billion. We met that goal and ended the year at a run rate of $110 billion.<\/p>

We are set up well for continued growth. So today I’ll provide an update on our AI progress and how it’s improving our core consumer products. Then I’ll touch on Cloud, YouTube, Platforms and Devices and Waymo.<\/p>

Let’s start with AI. Last quarter, I outlined the three areas of our differentiated full-stack approach to AI innovation: Our leading AI infrastructure, our World-class research, including models and tooling, and our products and platforms that bring these innovations to people at scale.<\/p>

First, AI infrastructure. Our sophisticated global network of cloud regions and data centers provides a powerful foundation for us and our customers, directly driving revenue. We have a unique advantage because we develop every component of our technology stack, including hardware, compilers, models and products. This approach allows us to drive efficiencies at every level, from training and serving, to developer productivity.<\/p>

In 2024, we broke ground on eleven new Cloud regions and data center campuses in places like South Carolina, Indiana, Missouri and around the world. We also announced plans for seven new subsea cable projects, strengthening global connectivity.<\/p>

Our leading infrastructure is also among the world’s most efficient. Google data centers deliver nearly four-times more computing power per unit of electricity compared to just five years ago. These efficiencies, coupled with the scalability, cost and performance we offer, are why organizations increasingly choose Google Cloud’s Platform.<\/p>

In fact, today, Cloud customers consume more than eight times the compute capacity for training and inferencing compared to eighteen months ago. We’ll continue to invest in our Cloud business to ensure we can address the increase in customer demand.<\/p>

Second, World-class research including models. In December, we unveiled Gemini 2.0, our most capable AI model yet, built for the agentic era. We launched an experimental version of Gemini 2.0 Flash, our workhorse model with low latency and enhanced performance.<\/p>

Flash has already rolled out to the Gemini app. And tomorrow we’re making 2.0 Flash generally available for developers and customers, along with other model updates, so stay tuned.<\/p>

Late last year, we also debuted our experimental Gemini 2.0 Flash Thinking model. The progress to scale thinking has been super fast, and the reviews so far have been extremely positive. We are working on even better thinking models and look forward to sharing those with the developer community soon.<\/p>

Gemini 2.0’s advances in multimodality and native tool use enable us to build new agents that bring us closer to our vision of a universal assistant. One early example is Deep Research. It uses agentic capabilities to explore complex topics on your behalf, and give key findings, along with sources. It launched in Gemini Advanced in December and is rolling out to Android users all over the world.<\/p>

We are seeing great product momentum with our consumer Gemini app, which debuted on iOS last November. And we have opened up trusted tester access to a handful of research prototypes, including Project Mariner, which can understand and reason across information on a browser screen to complete tasks, and Project Astra. We expect to bring features from both to the Gemini app later this year.<\/p>

We’re also excited by the progress of our video and image generation models: Veo 2, our state-of-the-art video generation model, and Imagen 3, our highest quality text-to-image model. These generative media models, as well as Gemini, consistently top industry leaderboards and score top marks across industry benchmarks. That’s why more than 4.4 million developers are using our Gemini models today, double the number from just six months ago.<\/p>

And we continue to drive research breakthroughs in quantum computing. At the end of last year, we announced Willow, our new state-of-the-art quantum computing chip that can reduce errors exponentially as we scale up using more qubits. Willow is an important step in our journey to build a useful quantum computer with practical applications. This technology holds so much promise, which is why there was real excitement around this breakthrough.<\/p>

Third, our products and platforms put AI into the hands of billions of people around the world. We have seven products and platforms with over two billion users, and all are using Gemini.<\/p>

That includes Search, where Gemini is powering our AI Overviews. People use Search more with AI Overviews and usage growth increases over time as people learn that they can ask new types of questions. This behavior is even more pronounced with younger users who really appreciate the speed and efficiency of this new format.<\/p>

We also are pleased to see how Circle to Search is driving additional Search use and opening up even more types of questions. This feature is also popular among younger users. Those who have tried Circle to Search before now use it to start more than 10% of their searches.<\/p>

As AI continues to expand the universe of queries that people can ask, 2025 is going to be one of the biggest years for Search innovation yet.<\/p>

Now, let me turn to key highlights from the quarter across Cloud, YouTube, Platforms and Devices, and Waymo.<\/p>

First, Google Cloud. Our AI-powered Cloud offerings enabled us to win customers such as Mercedes-Benz, Mercado Libre and Servier. In 2024, the number of first-time commitments more than doubled, compared to 2023. We also deepened customer relationships. Last year, we closed several strategic deals over one billion dollars. And the number of deals over $250 million doubled from the prior year.<\/p>

Our partners are further accelerating our growth, with customers purchasing billions of dollars of solutions through our Cloud Marketplace.<\/p>

We continue to see strong growth across our broad portfolio of AI-powered Cloud solutions. It begins with our AI Hypercomputer, which delivers leading performance and cost across both GPUs and TPUs. These advantages help Citadel with modeling markets and training, and enabled Wayfair to modernize its platform, improving performance and scalability by nearly 25%.<\/p>

In Q4, we saw strong uptake of Trillium, our sixth-generation TPU, which delivers four-times better training performance and three-times greater inference throughput compared to the previous generation.<\/p>

We also continue our strong relationship with Nvidia. We recently delivered their H200 base platforms to customers. And just last week, we were the first to announce a customer running on the highly-anticipated Blackwell platform.<\/p>

Our AI developer platform, Vertex AI, saw a 5x increase in customers year-over-year, with brands like Mondelez International and WPP building new applications and benefiting from our 200+ foundation models. Vertex usage increased 20x during 2024, with particularly strong developer adoption of Gemini Flash, Gemini 2.0, Imagen 3 and most recently, Veo.<\/p>

We’re also seeing strong growth in our AI-powered databases, data analytics and cybersecurity platforms. Customers including Radisson Hotels are now using Gemini to search and analyze multimodal data from across multiple Clouds.<\/p>

Our AI-powered Threat Intelligence and Security Operations products help customers, including Vodafone and AstraZeneca, identify, protect, and different[iate] against threats.<\/p>

Our growing portfolio of AI applications is also seeing strong customer adoption. In Q4, we introduced Google Agentspace, which helps enterprises synthesize data with Google-quality search, create Gemini-powered agents and automate transactions for employees. In addition, we recently gave all Google Workspace Business and Enterprise customers access to all of our powerful Gemini AI capabilities to help boost their productivity.<\/p>

Moving to YouTube. Nielsen data shows YouTube continues to be number one in streaming watchtime in the U.S., with our share of streaming now at a record high. On election day alone, over 45 million viewers across the U.S. watched election-related content on YouTube.<\/p>

Our early investment in podcasts is paying off. We integrated podcasts into the core YouTube experience, particularly with video. We are now the most frequently used service for consuming podcasts in the U.S., according to a recent Edison report. This success reflects our long-term approach of investing in emerging trends, from mobile to the living room.<\/p>

We now have over 250,000 creators in the YouTube Shopping affiliate program in the U.S. and Korea alone. We expanded YouTube Shopping at the end of last year to three additional countries, allowing even more creators to share their favorite products with fans and grow their businesses.<\/p>

Philipp will talk more about YouTube performance later in the call.<\/p>

Next, Platforms and Devices. Google One’s performance has been outstanding and is one of our fastest growing subscription products in terms of subscribers and revenue growth. Last month, we announced the first beta of Android 16, plus new Android updates, including a deeper Gemini integration, coming to the new Samsung Galaxy S25 series.<\/p>

We also recently announced Android XR, the first Android platform built for the Gemini era. Created with Samsung and Qualcomm, Android XR is designed to power an ecosystem of next-generation extended reality devices, like headsets and glasses.<\/p>

Finally, a few words on Waymo, which made tremendous progress last year, safely serving more than four million passenger trips. It’s now averaging over 150,000 trips each week and growing.<\/p>

Looking ahead, Waymo will be expanding its network and operations partnerships to open up new markets, including Austin and Atlanta this year and Miami next year. And in the coming weeks, Waymo One vehicles will arrive in Tokyo for their first international road trip. We are also developing the sixth-generation Waymo driver, which will significantly lower hardware costs.<\/p>

I want to thank our employees around the world for another great quarter. 2025 is going to be exciting, and we are all ready for it.<\/p>

Philipp, I’ll hand it over to you.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> <\/b>Thanks, Sundar. And hello, everyone.<\/p>

I will quickly cover performance for the quarter, then frame the rest of my remarks around the progress we are delivering across Search, Ads, YouTube and Partnerships, highlighting the impact AI is having on our business and our customers.<\/p>

Google Services revenues were $84 billion for the quarter, up 10%, driven primarily by 11% year-on-year growth in Advertising revenues. Strong growth in Search and YouTube advertising was partially offset by year-on-year decline in Network revenues.<\/p>

In terms of vertical performance, the 13% increase in Search & Other Revenues was led by Financial Services, followed by Retail.<\/p>

The 14% growth in YouTube advertising revenues was driven by strong spend on U.S. election advertising, with combined spend from both parties almost doubling from what we saw in the 2020 elections.<\/p>

Now, in Q4 we saw continued strong growth in revenues from Search. We had lots of exciting updates in December, and we’re rapidly integrating our AI innovation into our consumer experiences. We’ve already started testing Gemini 2.0 in AI Overviews and plan to roll it out more broadly later in the year.<\/p>

In Search, we’re seeing people increasingly ask entirely new questions using their voice, camera or in ways that were not possible before, like with Circle to Search. We’re making these benefits available to more consumers.<\/p>

Google is already present in over half of journeys where a new brand, product or retailer are discovered. By offering new ways for people to search, we’re expanding commercial opportunities for our advertisers.<\/p>

Shoppers can now take a photo of a product and, using Lens, quickly find information about the product, reviews, similar products and where they can get it for a great price. Lens is used for over 20 billion visual search queries every month, and the majority of these searches are incremental.<\/p>

Retail was particularly strong this holiday season, especially on Black Friday and Cyber Monday, which each generated over $1 billion in ad revenue. Interestingly, despite the U.S. holiday shopping season being the shortest since 2019, retail sales began much earlier, in October, causing the season to extend longer than anticipated.<\/p>

People shop more than a billion times a day across Google. Last quarter, we introduced a reinvented Google Shopping experience, rebuilt from the ground up with AI. This December saw roughly 13% more daily active users on Google Shopping in the U.S. compared to the same period in 2023.<\/p>

Closing out on Search with Travel, and sharing another interesting trend where we saw spend expand to “Travel Tuesday”. This contributed to 20% year-on-year revenue growth [from] travel advertisers across Cyber Monday and Travel Tuesday.<\/p>

Moving to Ads. We continue investing in AI capabilities across media buying, creative, and measurement. As I’ve said before, we believe that AI will revolutionize every part of the marketing value chain and, over the past quarter, we’ve seen how our customers are increasingly focusing on optimizing their use of AI.<\/p>

As an example, Petco used Demand Gen campaigns across targeting, creative generation and bidding to find new pet parent audiences across YouTube. They achieved a 275% higher return on ad spend and a 74% higher click through rate than their social benchmarks.<\/p>

On media buying, we made YouTube Select Creator Takeovers generally available in the U.S. and will be expanding to more markets this year. Creators know their audience the best, and Creator Takeovers help businesses connect with consumers through authentic and relevant content.<\/p>

Looking at creative, we introduced new controls and made reporting easier in PMax, helping customers better understand and reinvest into their best performing assets.<\/p>

Using asset generation in PMax, Event Tickets Center achieved a 5 times increase in production of creative assets, saving time and effort. They also increased conversions by 300% compared to the previous period when they used manual assets.<\/p>

And finally, measurement. Last week, we made Meridian, our marketing mix model, generally available for customers, helping more businesses reinvest into creative and media buying strategies that they know work.<\/p>

Based on the Nielsen meta analysis of marketing mixed models, on average, Google AI-powered video campaigns on YouTube deliver 17% higher return on advertising spend than manual campaigns.<\/p>

Turning to YouTube, we saw robust revenue growth backed by continued growth in watchtime across ad-supported and Premium experiences. Our focus here remains on building a streaming platform that enables creators to thrive and unlock the full potential of AI. Expanding on our state-of-the-art video generation model, we announced Veo 2, which creates incredibly high-quality video in a wide range of subjects and styles. It’s been inspiring to see how people are experimenting with it. We’ll make it available to creators on YouTube in the coming months.<\/p>

We continue to invest in helping YouTube creators work with brands. All advertisers globally can now promote YouTube creator videos in ad campaigns across all AI-powered campaign types in Google Ads, and creators can tag partners in their brand videos.<\/p>

Sephora used Demand Gen’s “Shorts-only” channel to boost traffic and brand searches for their Holiday Gift Guide campaign and leveraged creator collaborations to find the best gift. This drove an 82% relative uplift in searches for Sephora Holiday.<\/p>

Shorts continues its ascent and is closing the gap with long-form. In 2024, the monetization rate of Shorts relative to instream viewing increased by more than 30 percentage points in the U.S., and we expect to make additional progress in 2025.<\/p>

We’re making it easier for advertisers to benefit from Shorts on all screens. We’re particularly excited by its success on connected TV, which now makes up 15% of Shorts viewing in the U.S.<\/p>

Using a combination of ad formats, Louis Vuitton reached their overall objectives on both long-form and short-form content. Their Shorts exceeded the luxury goods benchmark for average view duration by 89% for equivalent video lengths, while their long-form content exceeded the benchmark by over 15%, with strong engagement from Gen Z and Millennials.<\/p>

Looking into the Living Room, we continue to be number one in streaming watchtime in the U.S. for nearly two years, according to Nielsen. And our share of streaming is at a record high. Viewers globally streamed over one billion hours of YouTube content daily on their TVs in 2024.<\/p>

YouTube makes multi-year investments to tap into shifting consumer behavior. The current surge in Living Room viewership directly reflects years of work to build the right products and partnerships. Creators are now prioritizing high-quality viewing experiences that truly shine on TV screens, inspiring even more viewers to tune in. In fact, the number of creators making a majority of revenue from TV is up over 30% year-on-year.<\/p>

We have also invested in podcasts, where popular shows like Club Shay Shay and Lex Fridman are increasingly a visual format. YouTube creators and viewers are embracing this. In 2024, people watched over 400 million hours of podcasts each month on living room devices alone. YouTube is now the most popular service for podcast listening in the U.S., according to Edison.<\/p>

As always, let me wrap with the strong momentum we’re seeing in Partnerships, where the breadth of what Google has to offer is increasingly being recognized.<\/p>

Sundar mentioned our deepening partnership with Samsung. Another expanding partnership is with Citi, who is modernizing its technology infrastructure with Google Cloud to transform employee and customer experiences. Using Google Cloud, it will improve its digital products, streamline employee workflows and use advanced high-performance computing to enable millions of daily computations.<\/p>

This partnership also fuels Citi’s generative AI initiatives across customer service, document summarization and search, to reduce manual processing.<\/p>

With that, allow me a moment to thank Googlers everywhere for their extraordinary commitment, and to our customers and partners for their continued trust.<\/p>

Anat, over to you!<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/b>Thank you, Philipp.<\/p>

We’re pleased with the continued momentum we’re seeing across the business, as Alphabet revenue for 2024 reached $350 billion, up 14% on a reported basis, and 15% in constant currency versus 2023.<\/p>

My comments will focus on year-over-year comparisons for the fourth quarter, unless I state otherwise.<\/p>

I will start with the results at the Alphabet level, and will then cover our segment results. I’ll end with some commentary on expectations over the first quarter and full year 2025.<\/p>

We had another strong quarter in Q4 with robust momentum across the business. Consolidated Revenues of $96.5 billion, increased by 12% in both reported and constant currency. Search remained the largest contributor to revenue growth, followed by Cloud.<\/p>

Total Cost of Revenues was $40.6 billion, up 8%.<\/p>

TAC was $14.8 billion, up 6%. We continue to see a revenue mix shift with Google Search growing at double-digit levels, while Network revenues, which have a much higher TAC rate, declined.<\/p>

Other Cost of Revenues was $25.8 billion, up 9%, with the increase primarily driven by content acquisition[s] costs, primarily for YouTube, followed by depreciation due to increasing investments in our technical infrastructure.<\/p>

Growth in Content Acquisition [Costs] and depreciation were partially offset by a year-over-year decline in hardware costs due to the shift in timing of our Made by Google launches to the third quarter 2024, compared to the fourth quarter of 2023.<\/p>

In terms of total expenses, the year-over-year comparisons reflect $1.2 billion in exit charges that we took in the fourth quarter of 2023, in connection with actions to optimize our global office space. As previously disclosed, those charges were allocated across the expense lines in Other Cost of Revenue and OpEx, based on associated headcount.<\/p>

Total operating expenses decreased 1% to $24.9 billion.<\/p>

R&D investments increased by 8%, primarily driven by increases in compensation and depreciation expenses, partially offset by the impact of charges for office space optimization in the fourth quarter of 2023.<\/p>

Sales and Marketing expenses decreased 5%, primarily reflecting the optimization charges last year, as well as declines in compensation and in Ads and Promotion expenses, due to the timing shift of the Pixel launch from Q4 to Q3.<\/p>

G&A expenses declined by 15%, reflecting a shift of timing in our charitable contributions, as well as the optimization charges last year.<\/p>

Operating income increased 31% this quarter to $31 billion, and operating margin increased to 32%, representing 4.6 points of margin expansion.<\/p>

Net income increased 28% to $26.5 billion, and earnings per share increased 31% to $2.15.<\/p>

We delivered Free Cash Flow of $24.8 billion in the fourth quarter, and $72.8 billion for the full year 2024. We ended the quarter with $96 billion in cash and marketable securities.<\/p>

Turning to segment results, Google Services revenues increased 10% to $84.1 billion, reflecting the strong momentum across Google Search and YouTube Ads.<\/p>

Google Search & Other Advertising Revenues increased by 13%, to $54 billion.<\/p>

The robust performance of Search was once again broad-based across verticals, led by the Financial Services vertical due to strength in Insurance, followed by Retail.<\/p>

YouTube advertising revenues increased 14% to $10.5 billion, driven by Brand, followed by Direct Response advertising.<\/p>

Network advertising revenues of $8 billion were down 4%.<\/p>

In the fourth quarter, the year-over-year comparison in all of our advertising revenue lines was impacted by the increasing strength in advertising revenues in Q4 2023, in part from APAC-based retailers.<\/p>

Subscription, Platforms and Device revenues increased 8% to $11.6 billion, primarily reflecting growth in subscription revenues, partially offset by the shift in timing of the launch of our Made by Google devices to the third quarter compared with the fourth quarter in 2023.<\/p>

We continue to have significant growth in our subscription products, primarily due to increase in the number of paid subscribers across YouTube TV, YouTube Music Premium and Google One.<\/p>

With regards to Platforms, we saw a slight increase in the growth rate in Play, primarily due to a strong increase in the number of buyers.<\/p>

Google Services operating income increased 23% to $32.8 billion. And operating margin increased from 35% to 39%, representing a meaningful margin expansion.<\/p>

Turning to the Google Cloud segment, which continued to deliver very strong results this quarter, revenues increased by 30% to $12 billion in the fourth quarter, reflecting growth in GCP across Core GCP products, AI infrastructure and Generative AI Solutions. Once again, GCP grew at a rate that was much higher than Cloud overall.<\/p>

Healthy Google Workspace growth was primarily driven by an increase in average revenue per seat.<\/p>

Google Cloud operating income increased to $2.1 billion, and operating margin increased from 9.4% to 17.5%. We’re pleased with the work the Cloud team is doing to deliver valuable solutions to customers and generate revenue growth, as well as its continued focus on driving efficiencies across the Cloud business.<\/p>

As for Other Bets, for the fourth quarter, revenues were $400 million and the operating loss was $1.2 billion. The year-over-year decline in revenues and increase in operating loss primarily reflect a milestone payment in the fourth quarter of 2023 for one of the Other Bets.<\/p>

Turning to Alphabet-level activities, the largest component of this line is our investments in AI research and development activities which support all of Alphabet. As a reminder, Alphabet-level activities have included nearly all severance charges from reductions in workforce and office space charges.<\/p>

In the fourth quarter of 2024, the biggest factor in the year-over-year comparison is the $1.2 billion in charges in the fourth quarter of 2023, almost entirely in connection with office space optimization.<\/p>

With respect to CapEx, our reported CapEx in the fourth quarter was $14 billion, primarily reflecting investments in our technical infrastructure, with the largest component being investment in servers, followed by data centers, to support the growth of our business across Google Services, Google Cloud and Google DeepMind.<\/p>

In Q4, we returned value to shareholders in the form of $15 billion in share repurchases and $2.4 billion in dividend payments. Overall, we returned a total of nearly $70 billion to shareholders in 2024.<\/p>

Turning to 2025, I would like to provide some commentary on several factors that will impact our business performance in both the first quarter and the full year 2025. First, in terms of revenues, I’ll highlight two items that will have meaningful impact on Q1 revenues across the company.<\/p>

The first is the impact of foreign exchange rates. At the current spot rates, we expect a larger headwind to our revenues from the strengthening of the U.S. dollar relative to key currencies in Q1 versus Q4 2024.<\/p>

Second is the impact of Leap Year. We expect a headwind from having one less day of revenue in Q1 2025 compared with Leap Year in the first quarter of 2024.<\/p>

As for our segments, [in] Google Services, advertising revenues in 2025 will be impacted by lapping the strength we experienced in the Financial Services vertical throughout 2024.<\/p>

And in Cloud, given that revenues are correlated with the timing of deployment of new capacity, we could see variability in Cloud revenue growth rates depending on when new capacity comes online during 2025.<\/p>

Moving to investments, starting with our expectation for CapEx for the full year 2025. As we mentioned on the Q3 call, as we expand our AI efforts, we expect to increase our investments in capital expenditure for technical infrastructure, primarily for servers, followed by data centers and networking.<\/p>

We expect to invest approximately $75 billion in CapEx in 2025, with approximately $16 billion to $18 billion of that in the first quarter. The expected total investment level may fluctuate from quarter to quarter, primarily due to timing of deliveries and construction schedules.<\/p>

In terms of expenses. First, the increase in our investment in CapEx over the past few years will increase pressure on the P&L, primarily in the form of higher depreciation.<\/p>

In 2024, we saw 28% year-over-year growth in depreciation as we put more technical infrastructure assets into service. Given the increasing CapEx investments over the past few years, we expect the growth rate in depreciation to accelerate in 2025.<\/p>

Second, we expect some headcount growth in 2025 in key investment areas, such as AI and Cloud.<\/p>

As you just heard from Sundar, we’re delivering products and solutions to customers at a rapid pace, building, testing, and launching products faster than ever before. And as I mentioned on the Q3 call, we’re doing that while also focusing on driving further efficiencies in how we operate the business.<\/p>

Before we take questions, I’d like to recap the financial results for the year. For the full year 2024, revenue grew by 14%, or by $43 billion, reaching $350 billion. Google Services and Google Cloud each continued to see double digit revenue growth, coupled with margin expansion. YouTube and Cloud revenues combined ended the year at $110 billion annual run rate.<\/p>

And in 2024, we generated total [operating] income of $112 billion, an increase of 33% from 2023.<\/p>

We’re pleased with the momentum we’re seeing in AI innovation and monetization. We’ve been using AI to improve the performance of our Ads business for well over a decade, and Cloud is generating billions in annual revenues from AI Infrastructure and Generative AI Solutions. We’re also excited about the potential to bring new experiences to users that will provide additional opportunities for monetization. And I look forward to sharing more on our progress throughout the year.<\/p>

Sundar, Philipp and I will now take your questions.<\/p>

Operator:<\/strong> <\/b>Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>

And our first question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>

Brian Nowak (Morgan Stanley): <\/strong>Thanks for taking my questions. I have two. One for Sundar, one for Anat.<\/p>

Sundar, maybe kind of step back on Search. It seems like there’s a lot of advances to come with Gen AI and agentic possibilities with Search. Can you sort of walk us through your big-picture vision over the next few years of how you think about your Search products continuing to evolve to stay at the top of the funnel and drive more engagement and monetization for your users and advertisers?<\/p>

And then the second one, Anat, I think about 90 days ago, you talked about sort of further efficiencies and areas of simplification on the OpEx space. Can you just sort of walk us through some examples of where you see the potential for further efficiencies to the OpEx space, excluding the D&A step-ups that we have to come in 2025? Thanks.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/b>Thanks, Brian.<\/p>

On Search, obviously, this has been a long, continual journey. AI Overviews has been the next step. It’s playing out positively. As we have indicated, the metrics look great. And we are obviously [trading] on the experience, bringing better and better models, expanding to the number of queries where it works and so on. But there’s a lot more to come.<\/p>

I think we’ll continue bringing AI in more powerful ways, in multimodal ways. Things like what we have done with Lens, Circle to Search. You can imagine the future with Project Astra.<\/p>

You can also imagine areas, like we have done with Gemini Deep Research, possibilities where you are really dramatically expanding the types of use cases for which Search can work, things which don’t always get answered instantaneously but can take some time to answer.<\/p>

Those are all areas of explorations, and you will see us putting newer experiences in front of users through the course of 2025. And so I do feel the opportunity space with AI, there’s a lot of unlock ahead.<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/b>Thanks. And for the question with regards to where do we see, or where do I see leverage moving forward and some of the comments I made on the previous call, I certainly see opportunities for further productivity and efficiency. And this is one of our priority areas. And we’re going to do that so that we can make sure we continue to invest in areas such as AI and Cloud, where we see potential for continued growth.<\/p>

I’ll remain focused on areas that I’ve mentioned before, which include the technical infrastructure. So the $75 billion in CapEx I mentioned for this year, the majority of that is going to go towards our technical infrastructure, which includes servers and data centers. So ensuring we do that in the most efficient way is critical.<\/p>

Second is managing headcount growth, and we’re going to be investing in areas of growth, such as AI and Cloud. But looking across the organization, moderating that growth will be important.<\/p>

Optimizing our real estate footprint is one of the areas I’ve mentioned. We’re continuing to focus on that, as well as looking at how we simplify the organization. We previously mentioned bringing like areas together. Sundar talked about bringing some of the AI research teams together so that we can operate with increased speed.<\/p>

But also, how we operate within the organization, using our own AI tools to how we run the business. Whether it’s the code that Sundar mentioned on the previous call, writing code with AI. Or even running some of our key processes using AI tools. So we’re looking at all that.<\/p>

This is not a one-quarter type of effort. It’s going to continue throughout the year, and we’re going to continue to focus on that so that we can support the growth in other areas.<\/p>

Operator:<\/strong> <\/b>Our next question comes from Doug Anmuth with JPMorgan. Your line is now open.<\/p>

Doug Anmuth (JPMorgan):<\/strong> <\/b>Thanks for taking the questions. One for Philipp and one for Anat.<\/p>

Philipp, can you just talk more about the expanded rollout of ads on AI Overviews and perhaps what additional things you may have learned in 4Q? And I guess, in particular, just curious if you rolled out to a higher percentage of commercial queries? And is it still fair to say that you’re monetizing nearly on par with existing Search?<\/p>

And then, Anat, just on Cloud growth, a little bit of decel 3Q to 4Q, but it sounded like you also suggested that you were capacity-constrained in the fourth quarter. I just wanted to push on that a little bit more. Is that accurate? Is it fair to say that revenue growth could have been higher with much more capacity? Thanks.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> <\/b>So on your first question, first of all, AI Overviews, which is really nice to see, continue to drive higher satisfaction and Search usage. So that’s really good.<\/p>

And as you know, we recently launched the ads within AI Overviews on mobile in the U.S., which built on our previous rollout of ads above and below.<\/p>

And as I talked about before, for the AI Overviews overall, we actually see monetization at approximately the same rate, which I think really gives us a strong base on which we can innovate even more.<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/b>On the Cloud question, first, I’m excited that we ended the quarter at $12 billion and a 30% year-over-year growth. Very impressive growth. And as I’ve mentioned in the prepared remarks, GCP grew at a much higher rate than overall Cloud.<\/p>

Two items to think about from a deceleration perspective, the first is we are lapping a very strong quarter [in] AI deployments in Q4 2023. The second is the one you’ve alluded to. We do see and have been seeing very strong demand for our AI products in the fourth quarter of 2024. And we exited the year with more demand than we had available capacity.<\/p>

So we are in a tight supply-demand situation, working very hard to bring more capacity online. As I mentioned, we’ve increased investment in CapEx in 2024, continuing to increase in 2025. And we’ll bring more capacity throughout the year.<\/p>

Doug Anmuth (JPMorgan): <\/strong>Thank you both.<\/p>

Operator:<\/strong> <\/b>Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>

Eric Sheridan (Goldman Sachs):<\/strong> <\/b>Thank you for taking the question. I’ll just ask one.<\/p>

Sundar, with the news that came out of China a little over two weeks ago, I think investors have been asking a lot of questions about the long-term cost curve for AI, as AI moves from the infrastructure layer to the application layer, or from training to inference, and maybe even custom silicon becomes more dominant across the theme.<\/p>

I would love to get your perspective on, your take on that news a couple weeks ago and what it might mean for Alphabet longer term. Thank you.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/b>Thanks, Eric.<\/p>

Look, I think there’s been a lot of observations on DeepSeek. First of all, I think it’s a tremendous team. I think they’ve done very, very good work.<\/p>

Look, I think for us, it’s always been obvious over time. There’s frontier model development; but you can drive a lot of efficiency to serve these models really, really well and if you look at one of the areas in which the Gemini models shine is the Pareto frontier of cost performance and latency. And if you look at all three attributes, I think we lead this Pareto frontier.<\/p>

And I would say both our 2.0 Flash models, our 2.0 Flash Thinking models, they are some of the most efficient models out there, including comparing to DeepSeek’s V3 and R1. And I think a lot of it is our strength of the full-stack development, end-to-end optimization, our obsession with cost per query. All of that, I think, sets us up well for the workloads ahead, both to serve billions of users across our products and on the Cloud side.<\/p>

A couple of things I would say are, if you look at the trajectory over the past three years, the proportion of the spend towards inference compared to training has been increasing, which is good, because obviously inference is to support businesses with good ROIC. And so I think that trend is good.<\/p>

I think the reasoning models, if anything, accelerates that trend, because it’s obviously scaling upon inference dimension as well.<\/p>

And so, look, I think part of the reason we are so excited about the AI opportunity is we know we can drive extraordinary use cases, because the cost of actually using it is going to keep coming down, which will make more use cases feasible, and that’s the opportunity space. It’s as big as it comes, and that’s why you’re seeing us invest to meet that moment.<\/p>

Operator:<\/strong> <\/b>Your next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> <\/b>Thank you. I have two, one for Philipp and one for Anat.<\/p>

Philipp, question to you is we’re starting to see more AI tools on eCommerce sites. Something like research with AI recommendations is on Google Shopping. Can you talk about how that product and other AI tools are impacting shopping behavior and how that’s impacting monetization?<\/p>

And then, I guess, the $75 billion question, Anat, is: How do you think about long-term capital intensity for this business? It sounds like there’s a bit of constraint on getting things built. But how do you think about the modeling of capital intensity going forward? What are the things you’re looking forward to in terms of whether or not this is the right level of spend? Thank you.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong>Look, excellent question. We’ve been using our advances in AI to make search for products on Google even easier, obviously. And in Q4, we actually introduced quite a transformed Google Shopping experience, which we rebuilt from the ground up with AI.<\/p>

And people shop more than a billion times a day across Google. Last quarter, we introduced this fully reinvented Google Shopping experience. In December, we saw roughly, I mentioned this, 13% more daily active users in Google Shopping in the U.S., compared to the same period last year. So that’s a good development here.<\/p>

And the new Google Shopping experience, specifically to your question, uses AI to really intelligently show the most relevant products, helping to speed up and simplify your research. You get an AI-generated brief with top things to consider for your search, plus maybe products that meet your needs.<\/p>

So shoppers very often want low prices, so the new page not only includes deal-finding tools like price comparison, price insights, price tracking throughout but there is also a new and dedicated personalized deals page, where you can browse deals for you. And all this is really built on the backbone of AI. So we think this is a very interesting opportunity.<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/b>And on the question of capital expenditure, I think you may have two questions in there. One is just the capital intensity and then how do we think about return on that invested capital.<\/p>

So on the first one certainly we’re looking ahead, but we’re managing very responsibly with a very rigorous even internal governance process, looking at how do we allocate the capacity, and what would we need to support the customer demand externally, but also across the Alphabet business.<\/p>

And as you’ve seen in the comment I just made on Cloud, we do have demand that exceeds our available capacity. So we’ll be working hard to address that and make sure we bring more capacity online.<\/p>

We do have the benefit of having a very broad business. And we can repurpose capacity, whether it’s through Google Services or Google Cloud to support. As I said, whether it’s Search or GDM or Google Cloud customers, we can do that in a more efficient manner.<\/p>

We also look at every investment that we make to ensure that we’re doing it in the most cost-efficient way to optimize our data centers. As you know, our strategy is mostly to rely on our own self-designed and built data centers. So they’re industry-leading in terms of those costs and power efficiency at scale.<\/p>

We have our own customized TPUs. They are customized for our own workloads, so they do deliver outstanding, superior performance in CapEx efficiency. So we’re going to be looking at all that when we make decisions as to how we’re going to progress capital investments throughout the coming years.<\/p>

Operator: <\/strong>Your next question comes from Mark Shmulik with Bernstein. Your line is now open.<\/p>

Mark Shmulik (Bernstein):<\/strong> <\/b>Thanks for taking the questions.<\/p>

Sundar, I just wanted to follow up to Brian’s question from earlier. With your own Project Mariner efforts and a competitor’s recent launch, it seems there’s suddenly really strong momentum on AI consumer agents and kind of catching up to that old Google Duplex vision.<\/p>

When you look a few years ahead, where do you see consumer agents going? And really, what does it mean to Google Search, outside of Lens? Is there room for both to flourish, or will they eventually both be in conflict with each other? Thank you.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/b>Look, I think, first of all, we are definitely seeing a lot of progress in the underlying capabilities of these models. Gemini 2.0 was definitely built with a view of enabling more agentic use cases.<\/p>

So we are definitely seeing progress inside, and I think we’ll be able to do more agentic experiences for our users.<\/p>

Look, I actually think all of this expands the opportunity space. Historically, we’ve had information use cases, but now you can act on your information needs in a much deeper way. It’s always been our vision when we have talked about Google Assistant, et cetera.<\/p>

So I think the opportunity space expands. I think there’s plenty -- it feels very far from a zero-sum game. There’s plenty of room, I think, for many new types of use cases to flourish.<\/p>

And I think for us, we have a clear sense of additional use cases we can start to tackle for our users in Google Search. And all the early work with AI Overviews shows that users will react positively to that. So I’m pretty excited about what’s ahead.<\/p>

Operator:<\/strong> <\/b>Your next question comes from Ross Sandler with Barclays. Your line is now open.<\/p>

Ross Sandler (Barclays):<\/strong> <\/b>Great. One on infrastructure and then one, Anat, on the guidance on revenue.<\/p>

So, Sundar, if we look at the inference cost per one million tokens, and not the API pricing we see for Gemini versus something like GPT4, but the raw cost of generating inference tokens on your TPU stack, how much more efficient do you think you guys are in terms of generating one million tokens, compared to inference cost running on your cloud peers? Do you see this as an advantage as everything shifts to inference?<\/p>

Anat, you called out lapping the Financial Services category strength in 2025 as a bit of a problem for Search. Could you just quantify a little bit of that? Is that kind of the same as when you guys talk about lapping the Asia outbound advertiser channel? Any numbers you can put around that headwind? Thank you very much.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/b>Ross, look, the whole TPU project started, our V1 was effectively an inferencing chip. Part of the reason we have taken the end-to-end stack approach is so that we can definitely drive a strong differentiation in end-to-end optimizing and not only on a cost, but on a latency basis, and a performance basis. Be at the Pareto frontier we mentioned.<\/p>

And I think our full-stack approach and our TPU efforts all give a meaningful advantage. You already see that. I know you asked about the cost, but it’s effectively captured. When we price outside, we pass on the differentiation. It’s partly why we’ve been able to bring forward Flash models at very attractive value props, which is what is driving both developer growth. We’ve doubled our developers to 4.4 million in just about six months. Vertex usage is up 20x last year.<\/p>

And so all of that is a direct result of that approach, and so we’ll continue doing that.<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/b>And on the question regarding my comment on lapping the strength in Financial Services, this is primarily related to the structural changes with regards to insurance. More specifically within Financial Services, it was the insurance segment. And we saw that continue, but it was a one-time kind of a step up, and then we saw throughout the year. I’m not going to give any specific numbers as to what we expect to see in 2025.<\/p>

But I’m pleased with the fact that we’re seeing and continuing to see strength across really all verticals, including Retail, and exiting the year in a position of strength. If anything, I would highlight, as you think about the year, the comments I’ve made about the impact of FX, as well as the fact that we have one less day of revenue in Q1.<\/p>

Operator:<\/strong> <\/b>Your next question comes from Justin Post with Bank of America. Your line is now open.<\/p>

Justin Post (Bank of America): <\/strong>Great. Thank you. A couple for Philipp.<\/p>

You mentioned higher Search usage with Overviews. Just wondering how you’re feeling about overall Search usage. Is it accelerating as you integrate more AI? I know there’s a lot of traffic growth at competitors with AI, but just wondering if you’re seeing a real increase in total volumes of information gathering.<\/p>

And then second, on YouTube, thinking about kind of maybe a move from more professional content to user-generated content, what is that doing for your usage, and how do you think about the margin impact from that? Thank you.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/b>Maybe just on Search usage overall, look, our metrics are healthy. We are continuing to see growth in Search on a year-on-year basis in terms of overall usage.<\/p>

Of course, within that, AI Overviews has seen stronger growth, particularly across all segments of users, including in younger users. So it’s being well-received.<\/p>

But overall, I think through this AI moment, I think Search is continuing to perform well. And as I said earlier, we have a lot more innovations to come this year. I think the product will evolve even more.<\/p>

And I think as you make Search, as you make it more easy for people to interact and ask followup questions, et cetera, I think we have an opportunity to drive further growth.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> <\/b>And some color on your YouTube question. Look, YouTube Ads overall had a very healthy growth in Q4, driven by Brand, followed by Direct Response. The U.S. election advertising led Brand revenue growth, and we saw nearly double the spending from 2020. I mentioned that we also had a strong contribution from Finance, Retail, and the Tech verticals. So overall strong operating metrics.<\/p>

Watchtime growth remains robust, particularly in key monetization opportunity areas, such as Shorts and Living Room, just to set the stage here one more time.<\/p>

On your question specifically on the UGC side. Look, we have a very strong position with creators. And we’ve always said creators are at the center of YouTube’s success here. They’re the number one most important thing we care about, and this strong position really gives us a lot of confidence here.<\/p>

Today, we have more than three million channels that are actually in the YouTube Partner Program, which is really an incredible program. So we are very, very confident with the position we have and where this goes.<\/p>

Operator:<\/strong> <\/b>And our last question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>

Ken Gawrelski (Wells Fargo):<\/strong> <\/b>Thank you very much. Two, please.<\/p>

I want to focus on Gemini, on the consumer agent side. Sundar, there was some press reports that suggested you have an ambitious goal on growing the usage by the end of ’25. Two questions on that, please.<\/p>

First, how should we think about the approach that you’re going to employ to achieve this goal? Is it more aggressive marketing for Gemini as a standalone product? Or is it tighter integration into existing experiences, whether it be Search, Mail, Maps, et cetera?<\/p>

And then the second one is, how should we think about the future monetization opportunity of Gemini? Today, it’s really a premium subscription offering, or a free offering. Over time, do you see an ad component? Anything you can share on that, please. Thank you.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/b>First of all, we’ve had strong momentum for Gemini on the app side, particularly through the second half of 2024. And some of it is we’ve made it more easily accessible. We’ve brought it to – for example, it’s a dedicated app on iOS, which has been super positively received and definitely getting a lot of traction there. So definitely driving organic growth by putting the product out.<\/p>

We just last week rolled out with our 2.0 series of models. So, 2.0 Flash, I mean, that’s one of the most capable models you can access at the free tier, so that’s definitely contributing as well.<\/p>

And so we are rapidly iterating. We’ve had a couple of key innovations there. Gemini Live, I think, has been definitely a hit with users, as well as for our advanced users, Gemini Deep Research.<\/p>

So I think a combination of innovation, continually training on the product and making it better is driving a lot of usage. And we’ll have a lot more to come as we go ahead this year. And we obviously have a partnership with Samsung, so there are other things which will contribute to it as well.<\/p>

On the monetization side, obviously for now, we are focused on a free tier and subscriptions. But obviously, as you’ve seen in Google over time, we always want to lead with user experience and we do have very good ideas for native ad concepts, but you will see us lead with the user experience.<\/p>

But I do think we are always committed to making the products work and reach billions of users at scale, and advertising has been a great aspect of that strategy.<\/p>

And so just like you’ve seen with YouTube, we’ll give people options over time. But for this year, I think you’ll see us be focused on the subscription direction.<\/p>

Ken Gawrelski (Wells Fargo):<\/strong> <\/b>Thank you.<\/p>

Operator:<\/strong> <\/b>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.<\/p>

Jim Friedland, Senior Director, Investor Relations:<\/strong> <\/b>Thanks, everyone, for joining us today. We look forward to speaking with you again on our First Quarter 2025 call.<\/p>

Thank you, and have a good evening.<\/p>

Operator:<\/strong> <\/b>Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.<\/p>","DocumentFileSize":null,"DocumentFileType":null,"DocumentPath":null,"EventId":1012,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"fd734731-9948-49eb-a51d-05533bd1ab82","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2025\/2024-Q4-Earnings-Call\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"643a73a4-94d9-4e99-b0b2-44340736b1ba","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"Q4","ReportYear":"2024","RevisionNumber":43620,"SeoName":"2024-Q4-Earnings-Call","TagsList":null,"TimeZone":"PT","Title":"2024 Q4 Earnings Call","WebCastLink":"","WorkflowId":"c074adf1-4cc0-48b6-9cb9-2662237c0ce0","EndDate":"02\/04\/2025 14:30:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"02\/04\/2025 13:30:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"Alphabet 2025 Q1 Earnings Call","Type":"Video","Url":"https:\/\/www.youtube.com\/watch?v=SySgINoaI9A"}],"Body":"

Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/p>

This transcript is provided for the convenience of investors only, for a full recording please see the <\/i>Q1 2025 Earnings Call webcast<\/i><\/a>.<\/i><\/p>

Operator:<\/strong> <\/span>Welcome, everyone. Thank you for standing by for the Alphabet First Quarter 2025 Earnings conference call.<\/p>

At this time, all participants are in a listen-only mode. After the speaker presentations, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/span><\/p>

I would now like to hand the conference over to your speaker today, Jim Friedland, Senior Director of Investor Relations. Please go ahead.<\/span><\/p>

Jim Friedland, Senior Director, Investor Relations:<\/strong> <\/span>Thank you. Good afternoon, everyone, and welcome to Alphabet’s First Quarter 2025 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi.<\/span><\/p>

Now, I’ll quickly cover the Safe Harbor.<\/span><\/p>

Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/span><\/p>

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement.<\/span><\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/span><\/p>

Our comments will be on year-over-year comparisons unless we state otherwise.<\/span><\/p>

And now, I’ll turn the call over to Sundar.<\/span><\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/span>Thanks, Jim. Good afternoon, everyone.<\/span><\/p>

We’re pleased with our strong results this quarter. We continued to see healthy growth and momentum across the business, including AI powering new features.<\/span><\/p>

In Search, we saw continued double-digit revenue growth. AI Overviews is going very well with over 1.5 billion users per month, and we are excited by the early positive reaction to AI Mode. There’s a lot more to come ahead.<\/span><\/p>

In Subscriptions, we surpassed 270 million paid subscriptions, with YouTube and Google One as key drivers.<\/span><\/p>

And Cloud grew rapidly with significant demand for our solutions, and you saw our leadership in AI at Cloud Next across infrastructure, agents, and more.<\/span><\/p>

Our differentiated, full-stack approach to AI continues to be central to our growth. This quarter was super exciting as we rolled out Gemini 2.5, our most intelligent AI model, which is achieving breakthroughs in performance, and it’s widely recognized as the best model in the industry. That’s an extraordinary foundation for our future innovation. And we are focused on bringing this to people and customers everywhere.<\/span><\/p>

Looking ahead to I\/O, Brandcast, and Google Marketing Live, I can’t wait for our teams to showcase the innovations they have been working on.<\/span><\/p>

Turning to our AI progress this quarter, which continues to enable significant growth opportunities. The elements of the AI stack I’ve previously mentioned are AI infrastructure; world-class research, including models and tooling; and our products and platforms.<\/span><\/p>

Starting with AI infrastructure, our long-term investments in our global network have positioned us well. Google’s network is robust and resilient, supported by over two-million miles of fiber and thirty-three subsea cables. Complementing this, we offer the industry’s widest range of TPUs and GPUs, and continue to invest in next-generation capabilities.<\/span><\/p>

Ironwood, our seventh-generation TPU and most powerful to date, is the first designed specifically for inference at scale. It delivers more than 10X improvement in compute power over our recent high-performance TPU, while being nearly twice as power efficient.<\/span><\/p>

Our strong relationship with NVIDIA continues to be a key advantage for us and our customers. We were the first cloud provider to offer NVIDIA’s groundbreaking B200 and GB200 Blackwell GPUs, and will be offering their next-generation Vera Rubin GPUs.<\/span><\/p>

Second, this infrastructure powers our world-class research, including our industry-leading models. We released Gemini 2.5 Pro last month, receiving extremely positive feedback from both developers and consumers.<\/span><\/p>

2.5 Pro is state-of-the-art on a wide range of benchmarks and debuted at number one on the Chatbot Arena by a significant margin.<\/span><\/p>

2.5 Pro achieved big leaps in reasoning, coding, science and math capabilities, opening up new possibilities for developers and customers. Active users in AI Studio and Gemini API have grown over 200% since the beginning of the year.<\/span><\/p>

And last week, we introduced 2.5 Flash, which enables developers to optimize quality and cost.<\/span><\/p>

Our latest image and video generation models, Imagen 3 and Veo 2, are rolling out broadly and are powering incredible creativity.<\/span><\/p>

Turning to open models, we launched Gemma 3 last month, delivering state-of-the-art performance for its size. Gemma models have been downloaded more than 140 million times.<\/span><\/p>

Lastly, we are developing AI models in new areas where there’s enormous opportunity. For example, our new Gemini Robotics models.<\/span><\/p>

And in health, we launched AI Co-Scientist, a multi-agent AI research system, while AlphaFold has now been used by over 2.5 million researchers.<\/span><\/p>

Third, turning to products and platforms. All 15 of our products with a half a billion users now use Gemini models. Android and Pixel are two examples of how we are putting the best AI in people’s hands, making it super easy to use AI for a wide range of tasks, just by using their camera, voice, or taking a screenshot.<\/span><\/p>

We are upgrading Google Assistant on mobile devices to Gemini; and later this year, we’ll upgrade tablets, cars and devices that connect to your phone, such as headphones and watches.<\/span><\/p>

The Pixel 9a launched to very strong reviews, providing the best of Google’s AI offerings, like Gemini Live and AI-powered camera features.<\/span><\/p>

And Gemini Live camera and screen sharing is now rolling out to all Android devices, including Pixel and Samsung S25.<\/span><\/p>

Now, moving on to key highlights from across Search, Cloud, YouTube and Waymo.<\/span><\/p>

First, Search. AI is one of the most revolutionary technologies for enabling and expanding our information mission. And for Search, we see it growing the number and types of questions we can answer. We’re already seeing this with AI Overviews, which now has more than 1.5 billion users every month.<\/span><\/p>

Nearly a year after we launched AI Overviews in the U.S., we continue to see that usage growth is increasing as people learn that Search is more useful for more of their queries. So we’re leaning in heavily here, continuing to roll the feature out in new countries, to more users, and to more queries.<\/span><\/p>

Building on the positive feedback for AI Overviews, in March we released AI Mode, an experiment in Labs. It expands what AI Overviews can do with more advanced reasoning, thinking, and multimodal capabilities to help with questions that need further exploration and comparisons. On average, AI Mode queries are twice as long as traditional Search queries.<\/span><\/p>

We are getting really positive feedback from early users about its design, fast response time, and ability to understand complex, nuanced questions.<\/span><\/p>

We also continue to see significant growth in multimodal queries. Circle to Search is now available on more than 250 million devices, with usage increasing nearly 40% this quarter. And monthly visual searches with Lens have increased by five billion since October.<\/span><\/p>

Moving on to Cloud. At Cloud Next, we announced major innovations, and over 500 hundred companies shared the business results they are achieving by working with us.<\/span><\/p>

We provide leading cost, performance, and reliability for AI training and inference. This enables us to deliver the best value for AI leaders, like Anyscale and Contextual AI, as well as global brands like Verizon. And for highly sensitive data and regulatory requirements, Google Distributed Cloud and our Sovereign AI make Gemini available on premises or in country.<\/span><\/p>

Our Vertex AI Platform makes over 200 foundation models available, helping customers, like Loews, integrate AI.<\/span><\/p>

We offer industry-leading models, including Gemini 2.5 Pro, 2.5 Flash, Imagen 3, Veo 2, Chirp, and Lyria. Plus open-source and third-party models like Llama 4 and Anthropic.<\/span><\/p>

We are the leading cloud solution for companies looking to the new era of AI agents; a big opportunity. Our Agent Development Kit is a new open-source framework to simplify the process of building sophisticated AI agents and multi-agent systems.<\/span><\/p>

And Agent Designer is a low-code tool to build AI agents and automate tasks in over 100 enterprise applications and systems.<\/span><\/p>

We are putting AI agents in the hands of employees at major global companies, like KPMG. With Google Agentspace, employees can find and synthesize information from within their organization, converse with AI agents, and take action with their enterprise applications. It combines enterprise search, conversational AI or chat and access to Gemini and third-party agents.<\/span><\/p>

We also offer prepackaged agents across customer engagement, coding, creativity and more that are helping to provide conversational customer experiences, accelerate software development, and improve decision-making.<\/span><\/p>

And, of course, Google Workspace. It delivers more than 2 billion AI assists monthly, including summarizing Gmail and refining Docs.<\/span><\/p>

Lastly, our cybersecurity products are helping organizations detect, investigate, and respond to cybersecurity threats. Our expertise, coupled with integrated Gemini AI advances, detects malware, prioritizes threats, and speeds up investigative workflows.<\/span><\/p>

This quarter, we were excited to announce our intent to acquire Wiz, a leading cloud security platform that protects all major clouds and code environments. Together we can make it easier and faster for organizations of all types and sizes to protect themselves end-to-end and across all major clouds. We think this will help spur more multi-cloud computing, something customers want.<\/span><\/p>

Next, YouTube. Yesterday marked a historic milestone: the 20th anniversary of the first video uploaded to YouTube. From that single 19-second upload the platform has grown into a global phenomenon, fundamentally changing how billions of people create, share, and experience content.<\/span><\/p>

Through all this growth, subscriptions are now a big part of the business. We continue to diversify subscription options, recently expanding our Premium Lite pilot to the U.S, giving users a new way to enjoy most videos on YouTube ad-free.<\/span><\/p>

TV is the primary device for YouTube viewing in the U.S. According to Nielsen, YouTube has been number one in streaming watch time in the U.S. for the last two years. And YouTube now has over one billion monthly active podcast users.<\/span><\/p>

YouTube Music and Premium reached over 125 million subscribers, including trials, globally.<\/span><\/p>

And finally, Waymo is now safely serving over a quarter of a million paid passenger trips each week. That’s up 5X from a year ago.<\/span><\/p>

This past quarter, Waymo opened up paid service in Silicon Valley. Through our partnership with Uber, we expanded in Austin and are preparing for our public launch in Atlanta later this summer. We recently announced Washington, D.C., as a future ride-hailing city, going live in 2026, alongside Miami. Waymo continues progressing on two important capabilities for riders; airport access and freeway driving.<\/span><\/p>

Thanks to all of our employees for their work this quarter. It was a great start to the year, and Q2 will be even more exciting.<\/span><\/p>

With that, Philipp, over to you.<\/span><\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> <\/span>Thanks, Sundar, and hello, everyone.<\/span><\/p>

I’ll quickly cover performance for the quarter, and then frame the rest of my remarks around the progress we are delivering across Search, Ads, YouTube and Partnerships.<\/span><\/p>

Google Services revenues were $77 billion for the quarter, up 10% year-on-year, driven by strong growth in Search and YouTube, partially offset by a year-on-year decline in Network revenues.<\/span><\/p>

To add some further color to the performance, the 10% increase in Search and Other revenues was led by Financial Services, primarily due to strength in Insurance, followed by Retail.<\/span><\/p>

YouTube saw similar performance across verticals. Its 10% growth in advertising revenues was driven by direct response, followed by brand.<\/span><\/p>

So, let’s start with Search, where we’ve seen robust growth in revenues. All around the world, over 2 billion people use Search every day to find information, compare products or shop. And there are more than 5 trillion searches on Google annually.<\/span><\/p>

We’ve continued our efforts to help more people ask entirely new questions, bringing more opportunities for businesses to connect with consumers, and as we’ve mentioned before, with the launch of AI Overviews, the volume of commercial queries has increased.<\/span><\/p>

Q1 marked our largest expansion to date for AI Overviews, both in terms of launching to new users and providing responses for more questions. The feature is now available in more than 15 languages across 140 countries.<\/span><\/p>

For AI Overviews, overall, we continue to see monetization at approximately the same rate, which gives us a strong base on which we can innovate even more.<\/span><\/p>

Turning to visual queries. On the last Earnings Call, I mentioned the success we’re seeing with Lens, where shoppers use their camera or images to quickly find information in ways they couldn’t before. In Q1, the number of people shopping on Lens grew by over 10%, and the majority of Lens queries are incremental.<\/span><\/p>

Sundar mentioned the significant growth we are also seeing with Circle to Search, as multimodality continues to drive queries across Search.<\/span><\/p>

Moving to Ads. More businesses, big and small, are adopting AI-powered campaigns, and the deployment of AI across our Ads business is driving results for our customers and for our business.<\/span><\/p>

Throughout 2024, we launched several features that leverage LLMs to enhance advertiser value, and we’re seeing this work pay off. The combination of these launches now allows us to match ads to more relevant search queries. And this helps advertisers reach customers in searches where we would not previously have shown their ads.<\/span><\/p>

Focusing on our customers, we continue to solve advertisers’ pain points and find opportunities to help them create, distribute and measure more performant ads; infusing AI at every step of the marketing process.<\/span><\/p>

On Audience insights, we released new asset-audience recommendations which tell businesses the themes that resonate most with their top audiences.<\/span><\/p>

On creatives, advertisers can now generate a broader variety of lifestyle imagery, customized to their business to better engage their customers, and use them across PMax, Demand Gen, Display, and Apps campaigns. Additionally in PMax, advertisers can automatically source images from their landing pages and crop them, increasing the variety of their assets.<\/span><\/p>

On media buying, advertisers continue to see how AI-powered campaigns help them find new customers.<\/span><\/p>

In Demand Gen, advertisers can more precisely manage ad placements across YouTube, Gmail, Discover and Google Display Network globally, and understand which assets work best at a channel level.<\/span><\/p>

Thanks to dozens of AI-powered improvements launched in 2024, businesses using Demand Gen now see an average 26% year-on-year increase in conversions per dollar spent for goals like purchases and leads. And when using Demand Gen with product feed, on average they see more than double the conversion per dollar spent year-over-year.<\/span><\/p>

As an example, Royal Canin combined Demand Gen and PMax campaigns to find more customers for its cat and dog food products. The integration resulted in a 2.7 times higher conversion rate, a 70% lower cost per acquisition for purchasers, and increased the value per user by 8%.<\/span><\/p>

Turning to YouTube, where we saw strong growth in revenues across Ads and Subscriptions. This week, we’re celebrating YouTube’s 20th anniversary. We’re proud of its leadership as a streaming destination where people come to watch everything they love; from live sports and creator-produced content, to Shorts and podcasts.<\/span><\/p>

Creators are what drives viewership, and, on average, they upload 20 million videos a day to YouTube.<\/span><\/p>

Our biggest creators generate a level of fandom and viewer engagement around large cultural moments on YouTube that brands can’t find anywhere else. During March Madness, brands aligned not only with clips and highlights from the game, but also with the creators who drive basketball culture, like Jesser and The Ringer’s J. Kyle Mann. In Q1, the growth of our reservation-based ads business more than doubled year-over-year.<\/span><\/p>

Brands and creators continue to use the opportunities that collaborations and partnerships offer. Toyota worked with Zach King, the king of short magical videos with over 42 million followers, to take over his channel. The Creator Takeover, and accompanying Creator Ad, lifted Toyota’s brand awareness by 25%, compared to a control group, and 9% compared to the Toyota brand ad.<\/span><\/p>

Looking at Shorts, engaged views grew by over 20% in the first quarter. We continue to be pleased with the progress we are making globally in Shorts monetization, relative to in-stream viewing, and are particularly encouraged by the trend in the U.S.<\/span><\/p>

As always, I’ll wrap up with the strong momentum we are seeing in Partnerships, where our customers increasingly recognize the strength and breadth of what Google has to offer.<\/span><\/p>

For instance, Roblox is partnering with Google Ad Manager to bring immersive ads to gamers. Gen Z gamers are Roblox’ biggest users, and thanks to our partnership, advertisers will be able to reach this audience with ads that blend seamlessly into the gaming experience.<\/span><\/p>

We also launched a YouTube Shorts Effect to help people release iconic Roblox heads and inspire fans to create content at scale.<\/span><\/p>

In closing, I’d like to thank Googlers everywhere for their contributions and commitment to our success, and to our customers and partners for their continued trust.<\/span><\/p>

Anat, over to you.<\/span><\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/span>Thank you, Philipp.<\/span><\/p>

My comments will focus on year-over-year comparisons for the first quarter, unless I state otherwise.<\/span><\/p>

I will start with results at the Alphabet level and will then cover our segment results. I’ll end with some commentary on our outlook for the second quarter and 2025.<\/span><\/p>

We had another strong quarter in Q1. Consolidated revenues of $90.2 billion increased by 12%, or 14% in constant currency. Search and YouTube advertising; Subscriptions, Platforms and Devices; and Google Cloud each had double-digit revenue growth this quarter, reflecting strong momentum across the business.<\/span><\/p>

Total Cost of Revenues was $36.4 billion, up 8%.<\/span><\/p>

TAC was $13.7 billion, up 6%. We continue to see a revenue mix shift with Google Search growth at double-digit levels, while Network revenues, which have a much higher TAC rate, declined.<\/span><\/p>

Other Cost of Revenues was $22.6 billion, up 9%, with the increase primarily driven by content acquisition costs, largely for YouTube, followed by depreciation and other technical infrastructure operations costs.<\/span><\/p>

Total operating expenses increased 9% to $23.3 billion.<\/span><\/p>

R&D investments increased by 14%, primarily driven by increases in compensation and depreciation expenses.<\/span><\/p>

Sales and Marketing expenses decreased 4%, primarily reflecting a decline in compensation expenses.<\/span><\/p>

G&A expenses increased by 17%, reflecting the impact of charges for legal and other matters.<\/span><\/p>

Operating income increased 20% this quarter to $31 billion. And operating margin increased to 33.9%, representing 2.3 points of margin expansion. Operating margin benefited from healthy revenue growth, a moderated pace of compensation growth, and a favorable mix shift towards lower TAC advertising revenues; partially offset by a year-on-year increase in depreciation expenses of just over $1 billion.<\/span><\/p>

Other income and expenses was $11.2 billion, primarily due to an unrealized gain on our non-marketable equity securities related to our investment in a private company, which we noted in our 10-K as a subsequent event.<\/span><\/p>

Net income increased 46% to $34.5 billion. And Earnings per share increased 49% to $2.81.<\/span><\/p>

We delivered Free Cash Flow of $19 billion in the first quarter, and $74.9 billion for the trailing twelve months. We ended the quarter with $95 billion in cash and marketable securities.<\/span><\/p>

Turning to segment results, Google Services revenues increased 10% to $77.3 billion, reflecting strength in Google Search and YouTube advertising and subscriptions.<\/span><\/p>

Google Search and Other advertising revenues increased by 10% to $50.7 billion.The robust performance of Search was, once again broad-based across verticals, led by Financial Services due primarily to strength in Insurance, followed by Retail.<\/span><\/p>

YouTube advertising revenues increased 10% to $8.9 billion, driven by direct response advertising, followed by brand.<\/span><\/p>

Network advertising [revenues] of $7.3 billion were down 2%.<\/span><\/p>

Subscriptions, Platforms and Devices revenues increased 19% to $10.4 billion, primarily reflecting growth in subscription revenues. This growth was primarily driven by YouTube subscription offerings, followed by Google One, with growth in the number of subscribers being the biggest driver of revenue growth.<\/span><\/p>

Google Services operating income increased 17% to $32.7 billion, and operating margin increased from 39.6% to 42.3%.<\/span><\/p>

Turning to the Google Cloud segment, which continued to deliver very strong results this quarter, revenue increased by 28% to $12.3 billion in the first quarter, reflecting growth in GCP across Core and AI products at a rate that was much higher than Cloud’s overall revenue growth rate.<\/span><\/p>

Growth in Google Workspace was primarily driven by an increase in average revenue per seat.<\/span><\/p>

Google Cloud operating income increased to $2.2 billion, and operating margin increased from 9.4% to 17.8%. As we scale our fleet, we continue to focus on driving improvements in productivity, efficiency, and utilization to offset the growth in expenses, particularly from higher depreciation.<\/span><\/p>

As to Other Bets, for the first quarter, revenues were $450 million, and operating loss was $1.2 billion. The year-on-year decline in revenue and increase in operating loss primarily reflect the milestone payment received in the first quarter of 2024 for one of our Other Bets.<\/span><\/p>

With respect to CapEx, our reported CapEx in the first quarter was $17.2 billion, primarily reflecting investment in our technical infrastructure, with the largest component being investment in servers, followed by data centers, to support the growth of our business across Google Services, Google Cloud, and Google DeepMind.<\/span><\/p>

In Q1, we returned value to shareholders in the form of $15.1 billion in share repurchases and $2.4 billion in dividend payments.<\/span><\/p>

As we announced today, our Board of Directors declared a 5% increase in our quarterly dividend, and also approved a new $70 billion share repurchase authorization.<\/span><\/p>

Turning to our outlook, I would like to provide some commentary on several factors that will impact our business performance in the second quarter and the remainder of 2025.<\/span><\/p>

First, in terms of revenue, I’ll highlight a couple of items that we mentioned last quarter that will have an impact on second quarter and 2025 revenue.<\/span><\/p>

First, in Google Services, advertising revenue in 2025 will be impacted by lapping the strength we experienced in the Financial Services vertical throughout 2024.<\/span><\/p>

Second, in Cloud, we’re in a tight demand\/supply environment. And given that revenues are correlated with the timing of deployment of new capacity, we could see variability in Cloud revenue growth rates, depending on capacity deployment each quarter. We expect relatively higher capacity deployment towards the end of 2025.<\/span><\/p>

Moving to investments, starting with our expectation for CapEx for the full year 2025. We still expect to invest approximately $75 billion in CapEx this year. The expected CapEx investment level may fluctuate from quarter to quarter, due to the impact of changes in the timing of deliveries and construction schedules.<\/span><\/p>

In terms of expenses, first, as I mentioned on our previous earnings call, the significant increase in our investments in CapEx over the past few years will continue to put pressure on the P&L, primarily in the form of higher depreciation.<\/span><\/p>

In the first quarter, we saw 31% year-on-year growth in depreciation from the increase in technical infrastructure assets placed in service. Given the increase in CapEx investments over the past few years, we expect the growth rate in depreciation to accelerate throughout 2025.<\/span><\/p>

Second, as we’ve previously said, we expect some headcount growth in 2025 in key investment areas. As we’ve disclosed previously, due to a shift in timing of our annual employee stock-based compensation award beginning in 2023, our first quarter stock-based comp expense is relatively lower compared to the remaining quarters of the year.<\/span><\/p>

In conclusion, as you heard from Sundar and Philipp, we’re pleased with the progress we’re making across the organization, the results for the quarter and the opportunities ahead.<\/span><\/p>

Our success as a company is grounded in our experience driving advancements in deep computer science that enables us to create innovative new products and services for users, businesses and partners around the world.<\/span><\/p>

We have a strong track record of incubating and then building these offerings into new profitable businesses for Alphabet.<\/span><\/p>

As we announced last quarter, YouTube and Cloud exited 2024 at a combined annual run rate of $110 billion.<\/span><\/p>

And as you heard from Sundar earlier, Waymo is continuing to progress in building on its impressive technological achievements to scale rapidly and develop a sustainable business model.<\/span><\/p>

Thank you. Sundar, Philipp, and I will now take your questions.<\/span><\/p>

Operator:<\/strong> <\/span>Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/span><\/p>

And our first question comes from Brian Nowak from Morgan Stanley. Your line is now open.<\/span><\/p>

Brian Nowak (Morgan Stanley): <\/strong><\/span>Great. Thanks for taking my questions. I have two.<\/span><\/p>

The first one is sort of the macro advertising backdrop. Anat, I know it’s April 24th, and you call out some factors thinking about the second quarter. Any other factors you’re seeing in advertising verticals or regions or categories that could be showing any signs of weakness quarter-to-date we should think through? Any other changes from typical seasonality in 2Q25 versus prior quarters?<\/span><\/p>

And the second one, Philipp, I think I heard you mention how the volume of commercial queries has increased. Maybe can you just walk us through which of the products are driving that increase in commercial queries? And as you sort of think about the pipeline of Search products, are there any others that you’re particularly excited about to continue to drive further commercial query growth throughout ’25-'26? Thanks.<\/span><\/p>

Philipp Schindler, SVP and CBO, Google: <\/strong><\/span>So let me take the first one as well. We saw broad-based strength across ad verticals in Q1, and we saw it -- I’ll give you a bit of vertical color here.<\/span><\/p>

Search was led again by Finance, due primarily to ongoing strength in Insurance. Retail, Healthcare, and Travel were actually also sizable contributors here to growth.<\/span><\/p>

With regard to Q2, we’re only a few weeks in, so it’s really too early to comment. I mean, we’re obviously not immune to the macro environment, but we wouldn’t want to speculate about potential impacts beyond noting that the changes to the de minimis exemption will obviously cause a slight headwind to our ads business in 2025, primarily from APAC-based retailers.<\/span><\/p>

And maybe to zoom out, I would say we have a lot of experience in managing through uncertain times, and we focus on helping our customers by providing deep insights into changing consumer behavior that is relevant to their business. Examples are auction dynamics, query trend insights on topics like replacement purchases and so on. So, we have a lot of experience in this area.<\/span><\/p>

On the commercial query side, look, AI Overviews continue to drive higher satisfaction and Search usage. And as I noted, Q1 was really our largest expansion to date for AI Overviews, both in terms of launching to new users and providing responses for more questions. That’s really the core already of the answer, that AI Overviews sits at the center of your question here.<\/span><\/p>

And when it comes to other products, look, I don’t want to speculate on this, but we’re happy with what we’re seeing here on AI Overviews. And I’m confident we can expand this to more products over time.<\/span><\/p>

Operator: <\/strong><\/span>Thank you. Your next question is from Doug Anmuth from JPMorgan. Your line is now open.<\/span><\/p>

Doug Anmuth (JPMorgan):<\/strong> <\/span>Thanks for taking my questions.<\/span><\/p>

Philipp, maybe just to go back to AI Overviews for a moment. Can you just tell us how we should think about the 1.5 billion AI Overviews users, just in terms of breadth of rollout? I know you’re saying monetization at approximately the same rate. But what does that mean in terms of click-through rates and conversion?<\/span><\/p>

And then, Anat, just curious if there have been any changes to Google’s approach to durably re-engineering the cost base since you’ve joined? And if macro weakens and you see more of a slowdown, would you expect to find additional opportunities to cut back more on costs? Thank you.<\/span><\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> <\/span>Look, on the ads in AI Overviews. Late last year actually, we launched them within the AI Overviews on mobile in the U.S. and this builds on our previous rollout of ads above and below, so this was a change we have.<\/span><\/p>

As I talked about it before, for AI Overviews overall, we see the monetization at approximately the same rate, which gives us a strong base on which we can innovate even more, so I’m very happy with this. I don’t think this is the moment to go into the details of click-through rates and conversion and so on.<\/span><\/p>

But overall, we’re happy with what we’re seeing.<\/span><\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/span>And to your question on our approach to productivity and efficiency, it hasn’t really changed. I’ve mentioned my approach, and our approach as a company, at the end of 2024, and we’re still focused on driving efficiency and productivity throughout the organization, both in our operating expenses and in our CapEx. I’ve mentioned some of these during my prepared remarks.<\/span><\/p>

But certainly, this helps us as we think about the investments we need to make in innovation to drive long-term sustainable growth profile for the company, we’re able to repurpose some of these efficiencies into these investments.<\/span><\/p>

As well as, as you think about the increase in CapEx we’ve seen over the past several years, and what we’re investing this year, this will put additional pressure on the income statement in the form of depreciation, so we’re working hard to try and offset some of the headwinds.<\/span><\/p>

As well as within the CapEx investments themselves, $75 billion, we’re looking at how do we make sure every dollar is used efficiently. We have a highly rigorous process to determine the demand behind it, and then the allocation of the compute associated with our technical infrastructure investments, ensuring that we’re utilizing that appropriately and that we’re highly efficient with everything we’re doing.<\/span><\/p>

You’ve seen some of the announcements and some of the changes, but we’re focusing on continuing to moderate the pace of compensation growth, looking at our real estate footprint, and again the buildout and utilization of our technical infrastructure across the business.<\/span><\/p>

Doug Anmuth (JPMorgan):<\/strong> <\/span>Great. Thank you both.<\/span><\/p>

Operator: <\/strong><\/span>Thank you. Our next question comes from Eric Sheridan from Goldman Sachs. Your line is now open.<\/span><\/p>

Eric Sheridan (Goldman Sachs):<\/strong> <\/span>Thank you for taking the questions.<\/span><\/p>

First, maybe for Sundar. When you look across the consumer AI landscape today, how are you thinking about continuing to drive differentiation for Gemini as a platform through the lens of usage, utility, or putting product innovation at the forefront of driving consumer habits?<\/span><\/p>

And then the second one, maybe for Anat. If the macro environment were to change and become more downwardly volatile, how should investors think about the investments that are must-make this year, or almost fixed in nature, versus where there might be more flexibility to alter the investment priorities of the company if the macro environment were to worsen? Thank you so much.<\/span><\/p>

Sundar Pichai, CEO, Alphabet and Google: <\/strong><\/span>Thanks, Eric.<\/span><\/p>

Obviously, it’s an exciting moment on the AI front. I think the foundation for everything is obviously the frontier model progress we are seeing, particularly with 2.5 Pro and Flash, I think we’re well-positioned. We are seeing tremendous reception from developers, enterprises, and consumers, too.<\/span><\/p>

And obviously, we are delivering consumer AI experiences across our product portfolio, including the primary way people experience it is obviously in Search with AI Overviews and very early days with AI Mode, but that will be a consumer AI-forward experience, and we are already seeing very positive feedback. People are typing in roughly 2X longer queries compared to traditional Search. So there’s a lot of excitement there.<\/span><\/p>

And in the Gemini app, which you asked about, we’ve really seen increased momentum, particularly over the last few weeks as we have rolled out not just the newer models, but we’re seeing users are really responding well to all the innovation. Gemini Live, which is based on Project Astra, has been very well-received. DeepResearch, based on 2.5 Pro, is SOTA, and that’s been well-received. And Canvas- we have had a lot of traction as well.<\/span><\/p>

And so, we are definitely investing more. We have recently organized ourselves better to capitalize on this momentum, and I’m excited about our roadmap there.<\/span><\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/span>And on the investments this year and overall should there be any macroeconomic changes. As I said, we’re still planning to invest approximately $75 billion in CapEx this year. We do see a tremendous opportunity ahead of us across the organization, whether it’s to support Google Services, Google Cloud and Google DeepMind.<\/span><\/p>

Recall I’ve stated on the Q4 call that we exited the year in Cloud specifically, with more customer demand than we had capacity. And that was the case this quarter as well. So, we want to make sure we ramp up to support customer needs and customer demands.<\/span><\/p>

Having said that, we’re investing in long term, and we’re investing in innovation. That’s the essence of our business, and we want to do it in a responsible fashion.<\/span><\/p>

So, you’ve seen us over the past couple years, and we’re continuing to do this and you’re seeing this in our results, drive efficiency and productivity throughout the business.<\/span><\/p>

We’ve announced things such as consolidation of teams, which helps not just with cost but with velocity and speed, we’re able to get things to market faster, so that’s one of the areas we’re focused on. You heard from Sundar the last couple of calls on just the rapid pace of innovation we’re bringing to the marketplace.<\/span><\/p>

So, the way we’re doing this across the business to drive productivity and efficiency should help us have a more resilient organization, irrespective of macroeconomic conditions.<\/span><\/p>

But certainly, we don’t ignore that. We always look at what’s happening outside the organization as well as inside, but invest appropriately to drive both the short-term growth as well as the long-term growth.<\/span><\/p>

Eric Sheridan (Goldman Sachs): <\/strong><\/span>Thank you.<\/span><\/p>

Operator: <\/strong><\/span>Thank you. Our next question comes from Ross Sandler from Barclays. Your line is now open.<\/span><\/p>

Ross Sandler (Barclays):<\/strong> <\/span>Great, thanks. One for Sundar; one for Philipp.<\/span><\/p>

Sundar, it was disclosed this week in the trial that’s going on that Gemini has 35 million DAUs. And just curious, that number obviously trails ChatGPT by a pretty wide margin. Could you just talk about the strategy to get that DAU figure much higher that you guys are deploying?<\/span><\/p>

And then, Philipp, just curious to hear what you’re seeing on the brand advertising side at YouTube in 1Q and into early 2Q. Are brands holding up relatively well, like direct response, or are they starting to react to some of these macro jitters that we’re all experiencing? Any thoughts there? Thank you very much.<\/span><\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/span>Thanks, Ross. I think I touched upon this to Eric’s question as well. But we are definitely, I think, there’s been a lot of momentum in terms of product features we’ve been introducing. And we are definitely seeing reception, including increased adoption and usage, based on those features. So, I think we are in a good, positive cycle.<\/span><\/p>

The recent advances on the model frontier, by many metrics, I think we have the best model out there now, and I think that’s going to drive increased adoption as well.<\/span><\/p>

And, again, I would reiterate, people are using, obviously we have 1.5 billion users through AI Overviews interacting with AI in a deep way, in a very engaged way.<\/span><\/p>

Obviously, we are innovating with AI Mode. And we have a very exciting roadmap ahead with the Gemini app as well. So, across the board, super, super excited about what’s ahead.<\/span><\/p>

Philipp Schindler, SVP and CBO, Google: <\/span>And on your brand question, look, brand, and by the way, also direct response had very solid growth in Q1.<\/span><\/p>

Brand advertisers really enjoyed cultural moments we had, like Coachella, for example, or March Madness. We had strong contributions overall from Finance and Retail verticals in Q1 on this side as well.<\/span><\/p>

The operating metrics for YouTube were strong in Q1. Watch time growth remains robust, particularly in key monetization opportunity areas, such as Shorts and Living Room.<\/span><\/p>

It’s also, by the way, nice to see the strong position of our creators who obviously benefit from the brand piece, which gives us a lot of confidence when we look at it more closely.<\/span><\/p>

And on the Q2 side, I think I mentioned it’s too early to really comment on that.<\/span><\/p>

Operator:<\/strong> <\/span>Thank you. Your next question is from Mark Shmulik from Bernstein. Your line is now open.<\/span><\/p>

Mark Shmulik (Bernstein):<\/strong> <\/span>Great. Thanks for taking my questions.<\/span><\/p>

Sundar, appreciate the color on Gemini deployment across kind of the 15 products with half a billion users or more. It would be great to hear more about where you’re seeing the most usage and deployment of GenAI internally at Google. Perhaps, what are the capabilities? Are they in a place today in terms of either supplementing or augmenting the workforce?<\/span><\/p>

And then just to build on that earlier AI Mode-type questions, appreciate that AI Mode has 2X longer queries than traditional Search. But any color you can share, perhaps on how AI Mode’s behavior differs from how consumers are using the Gemini app? Thank you.<\/span><\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/span>Look, internally, this has been an extraordinary amount of focus and excitement. Both because I think the early use cases have been transformative in nature and I think it still feels like early days, a long ways to go.<\/span><\/p>

Obviously, I had mentioned a few months ago, in terms of how we are using AI for coding, we are continuing to make a lot of progress there in terms of people using coding suggestions. I think, the last time I said a number, it was, like, 25% of code that’s checked in involves people accepting AI-suggested solutions. That number is well over 30% now.<\/span><\/p>

But more importantly, we have deployed more deeper flows and particularly with the newer models, I think we are working on early agentic workflows and how we can get those coding experiences to be much deeper.<\/span><\/p>

We are deploying it across all parts of the company. Our customer service teams are deeply leading the way there. We have both dramatically enhanced our user experience, as well as made it much more efficient to do so. And we are actually bringing all our learnings and expertise in our solutions, through Cloud, to our other customers.<\/span><\/p>

But beyond that, all the way from the Finance team preparing for this earnings call, to everything, it’s deeply embedded in everything we do. But I still see it as early days, and there’s going to be a lot more to do.<\/span><\/p>

On AI Mode, look, I think we are just leaning in on the early positive feedback as we scale up AI Overviews. It’s been one of our most positive launches, but it’s been clear people have wanted even more of it.<\/span><\/p>

And so with AI Mode, we are bringing our state-of-the-art Gemini models right into Search. I mentioned people typing longer queries, there’s a lot more complex, nuanced questions. People are following through more. People are appreciating the clean design, the fast response time, and the fact that they can kind of be much more open-ended, can undertake more complicated tasks. Product comparisons, for example, has been a positive one, exploring how-to’s, planning a trip.<\/span><\/p>

So, those are the kinds of early feedback we are seeing, and I think we are, obviously, really focused on improving the product across all of AI Mode, AI Overviews, and the Gemini app. And we are seeing positive user traction as well.<\/span><\/p>

Operator: <\/strong><\/span>Thank you. Your next question is from Mark Mahaney from Evercore. Your line is now open.<\/span><\/p>

Mark Mahaney (Evercore):<\/strong> <\/span>Okay, thanks. One for Anat and one for Sundar.<\/span><\/p>

Anat, getting back to a question I think that Doug was asking earlier, you just put up record-high or multiyear record-high margins for both Google Services and for Google Cloud.<\/span><\/p>

You talked, though, about depreciation expenses accelerating rapidly throughout the year because of all the investments you’ve warned people about.<\/span><\/p>

Back in the September quarter, you seemed relatively confident that you had enough levers to kind of offset kind of rising infrastructure costs. Was that still your -- six months later, is that still your view that you’ve got enough levers, that even with the rising infrastructure costs, there’s enough in there to kind of counterbalance that?<\/span><\/p>

 <\/span>And then just briefly on Waymo, continues to rise aggressively, the numbers, Sundar. The long-term business model for Waymo, is there a reason to make a decision on that soon? Or have you already made the decision on whether this is a long-term licensing model, or you really want to run this as a standalone ride-sharing, delivery, autonomous vehicle business? Thank you very much.<\/span><\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong><\/span>Thanks.<\/span><\/p>

On your first question on profitability and what levers do we have and do we still have levers to pull. First, I think every organization can always push a little further. I don’t view productivity goals or efficiency as an episodic, kind of project-based effort but rather a continuous effort, that when you get to a certain place you push a little further.<\/span><\/p>

Having said that, we do have significant investments we’re making across the organization, and we have been making them for the past several quarters. And we’ve been able to do it because we were able to find efficiency to fund those investments across the organization, those are for products and services that are going to drive long-term growth for the company.<\/span><\/p>

So, while we’re trying to offset as much of the headwind associated with the increase in infrastructure costs, it will become more difficult. As I said, the depreciation will accelerate. We had about a 31% year-over-year growth in depreciation this quarter, and it will be higher as we go throughout the year. So, think about that kind of as a headwind that we have to manage against.<\/span><\/p>

But we’re continuing with pushing across the organization, leveraging, Sundar mentioned, the use of AI, of an AI-first Google, across several of our functions, to help us manage a larger scope of work using our AI, AI agents, and AI tools. As Sundar mentioned, we did leverage it in preparation for the earnings call, and we’re leveraging across several functions.<\/span><\/p>

So, there are opportunities, but there are also great opportunities for investment. And we want to make sure that we make room for – to make these investments to drive long-term growth and ensure we have a very resilient, long-term growth profile for the company.<\/span><\/p>

Sundar Pichai, CEO, Alphabet and Google: <\/strong><\/span>And, Mark, thanks. I think this is probably the first question I’ve got on an earnings call on Waymo, so thank you and I think it’s a sign of its progress.<\/span><\/p>

Look, the thing that excites me is I think we’ve been laser-focused, and we’ll continue to be, on building the world’s best driver. And I think doing that well really gives you a variety of optionality and business models across geographies, et cetera.<\/span><\/p>

It will also require a successful ecosystem of partners, and we can’t possibly do it all ourselves. And so I’m excited about the progress the teams have made through a variety of partnerships.<\/span><\/p>

Obviously, a highlight of it is our partnership with Uber. We are very pleased with what we are already seeing in Austin in terms of rider satisfaction. We look forward to offering the first paid rides in Atlanta, via Uber, later this year.<\/span><\/p>

But we are also building up a network of partners. For example, for maintaining fleets of vehicles and doing all the operations related to that, with the recently announced partnership with Moove in Phoenix and Miami. Obviously partnerships with OEMs. There are future optionality around personal ownership as well.<\/span><\/p>

So, we are widely exploring, but at the same time, clearly staying focused and making progress, both in terms of safety, the driver experience, and progress on the business model and operationally scaling it up.<\/span><\/p>

Mark Mahaney (Evercore): <\/strong><\/span>Thank you very much.<\/span><\/p>

Operator:<\/strong> <\/span>Thank you. Our next question comes from Ken Gawrelski from Wells Fargo. Your line is now open.<\/span><\/p>

Ken Gawrelski (Wells Fargo): <\/strong><\/span>Thank you. Two, if I may please.<\/span><\/p>

First, on AI-powered Search. You have a number of AI-powered search interfaces, including three most prominently: AI Overviews, AI Mode, and Gemini.<\/span><\/p>

In the future, should we think of these as distinct experiences that will be long-lasting, or more experimental now and Google will eventually focus on one approach going forward?<\/span><\/p>

And the second one is more on the financial side. You continue to experience very healthy gross-margin expansion. We see the TAC, sure. But, Anat, you also talked about the offsetting depreciation expense.<\/span><\/p>

Could you talk about, beyond those two buckets, where you’re seeing the real savings on the COGS line in driving that gross-margin expansion? And maybe even how we should be thinking about that going forward? Thank you.<\/span><\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/span>Ken<\/span>, <\/span>maybe on AI-powered search and how do we see our consumer experiences - look, I do think Search and Gemini, obviously, will be two distinct efforts, right. I think there are obviously some areas of overlap, but they also expose very, very different use cases.<\/span><\/p>

And so, for example, in Gemini, we see people iteratively coding and going much deeper on a coding workflow as an example. So, I think both will be around.<\/span><\/p>

Within Search, we think of AI Overviews as scaling up and working for our entire user base, but in AI Mode is the tip of the tree for us pushing forward on an AI-forward experience.<\/span><\/p>

There will be things which we discover there, which will make sense in the context of AI Overviews, so I think will flow through to our user base. But you almost want to think of: “What are the most advanced one million people using Search for? The most advanced 10 million people? And then how do a billion and a half people use Search for?” We want to innovate, and so I think this allows us to do that.<\/span><\/p>

But the true north through all of this is user feedback, user satisfaction, user experience. And so, that will determine where this all works out in the future.<\/span><\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> <\/span>And to your question on gross margin, a couple of trends to highlight there. And I’ve mentioned this in the prepared remarks. You’ve seen improvement in TAC that’s really driven by the change in revenue mix, with continued Search growth and then Network revenue declines. Network revenue has a much higher TAC rate, so that mix is helping us from a gross-margin perspective. So, think about that as well.<\/span><\/p>

Now, we do have depreciation for technical infrastructure, hits primarily in two places in the income statement. One is in Other Cost of Sales, and the rest is in R&D. So, it is in that line item that’s impacting cost of sales.<\/span><\/p>

Now, we’ve had some efficiencies there. And I did mention the improvement in our overall – cost of <\/span>–<\/i> headcount growth and compensation kind of moderating those growth. So, that helps us as well more than offset the depreciation increases in Q1.<\/span><\/p>

But as I’ve mentioned, this number will be higher in the coming quarters. Recall, we said approximately $75 billion in CapEx, which is up from $55 billion, or just over $50 billion last year. So, there is expected to be quite a significant increase in depreciation.<\/span><\/p>

Operator:<\/strong> <\/span>Thank you. And our last question comes from Ron Josey from Citi. Your line is now open.<\/span><\/p>

Ron Josey (Citi): <\/strong><\/span>Great. <\/strong>Thanks for taking the question.<\/span><\/p>

Philipp, I wanted to touch a little bit more on your comments around direct response and YouTube. I think it’s been improving and been a driver over the past couple quarters. I’d love to hear more just about what’s driving that. Is that the Demand Gen and integration with PMax? Or are users perhaps more involved on direct response now that Shorts usage is rising? Would love your thoughts there. Thank you.<\/span><\/p>

Philipp Schindler, SVP and CBO, Google:<\/strong> <\/span>Yeah, I think there’s a lot of different factors. Mostly we continue to help our customers really using our AI-powered tools, you mentioned a few of them,to drive performance. That’s a very big one.<\/span><\/p>

As I mentioned before, we’re also happy with the progress we’re seeing on Shorts and closing the monetization gap here to the overall business, which is actually really nice to see, especially in the U.S. So, we’re very happy with that, yeah.<\/span><\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/strong> <\/span>And I’ll just chime in to say, YouTube just celebrated its 20th birthday and we now have more than 20 billion videos on YouTube, and we get 20 million videos uploaded every day.<\/span><\/p>

So, I think it’s a tremendous platform, and thanks to all the creators and users who have supported us there over the years.<\/span><\/p>

Ron Josey (Citi):<\/strong> <\/span>Great, thank you.<\/span><\/p>

Operator:<\/strong> <\/span>Thank you. And that concludes our question-and-answer session for today.<\/span><\/p>

I would like to turn the conference back over to Jim Friedland for any further remarks.<\/span><\/p>

Jim Friedland, Senior Director, Investor Relations:<\/strong> <\/span>Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2025 call. Thank you, and have a good evening.<\/span><\/p>

Operator: <\/strong><\/span>Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.<\/span><\/p>
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Transcript<\/div>\r\n

For a PDF version of the transcript please click here<\/a>.<\/p>

This preliminary transcript is provided for the convenience of investors only, for a full recording please see the MoffettNathanson Media, Internet, and Communications Conference webcast<\/u><\/a>. <\/p>

Neal Mohan, Chief Executive Officer of YouTube, at the MoffettNathanson Media, Internet, and Communications Conference on May 15, 2025<\/strong><\/p>

Michael Nathanson (MoffettNathanson): <\/strong>Thank you for being here. Neal, thanks for being here.<\/p>

Before we get started, I am given the role of the Safe Harbor spokesperson.<\/p>

So, some of the statements that Mr. Mohan may make today could be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to Alphabet’s forms 10-K and 10-Q, including the risk factors discussed in its form 10-K filing. Any forward-looking statements that Neal makes are based on assumptions as of today, and Alphabet undertakes no obligation to update them.<\/p>

Okay. So now, my introduction for Neal. For those that don’t know - CEO of YouTube. Prior to becoming the CEO in 2023, Neal served as YouTube’s Chief Product Officer, responsible for the company’s forays into streaming, Shorts, subscriptions, podcasting, and growing contributions to the creator economy and scaled Trust & Safety efforts.<\/p>

Before joining YouTube, Neal led the product development team and strategy at DoubleClick, and then oversaw its acquisition and integration with Google.<\/p>

So, Neal, thank you for being here. Once again, we really appreciate it.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Thank you for having me, Michael. It’s great to be here.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> So, YouTube is celebrating its 20th year anniversary this year. What has surprised you most about the platform during your tenure there, and what are your key priorities to keep the product momentum going?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Sure, yeah. So happy birthday, YouTube! Very excited, it’s hard to believe that it’s our 20th anniversary.<\/p>

You know, I think what I would say, whether it’s a surprise or not, I think, sort of the biggest kind of thought I have on reflection, and I’ve been involved with YouTube for a very, very long time, is just you know it was a simple website that started where you would upload grainy videos of yourself; you know me at the zoo and others like that. And you fast-forward two decades later to today, and it is a place - this incredibly vibrant creator economy ecosystem.<\/p>

Our creators are really the start-ups of Hollywood, just to carry that Silicon Valley analogy forward. They are innovative and disruptive. They have full studios themselves, I’ve visited some of them, employ lots and lots of people, and they’re pushing the boundaries in terms of entertainment and culture. They’re the reasons why YouTube is the epicenter of culture across the world. And so, it’s just amazing to see that transformation.<\/p>

In terms of our priorities, the way that I like to think about the YouTube business is, you know, across multiple interconnected pieces of flywheel, if you will. And it starts, as I was just describing, with our creators.<\/p>

And so, how do we make it so that they can continue to build an audience, build a community on YouTube, that is the secret sauce of YouTube. You come to YouTube to connect with your favorite content, your favorite creators, every single day, and how do we help them grow their business- they’re entrepreneurs as well. So, that’s really the first leg of the flywheel.<\/p>

So, creation tools, supporting multiple formats, everything from 15-second Shorts to 15-minute traditional, sort of, vlog format to 15-hour livestream. So, creators.<\/p>

The second, of course, is, as I said, we all as fans and viewers come to YouTube to connect with these creators. So how do we create new, innovative formats? One of our biggest priorities has been connected TVs. How do we invest in that from a user standpoint, viewer standpoint? Shorts, of course, is a big, big priority for us. Podcasts, of course, is something that we’ve been investing in. So, viewers.<\/p>

And then, kind of, the third leg of that stool, of that flywheel, is really monetization. And we really are fundamentally a twin-engine monetization capability with our AVOD business, but also now our SVOD business across YouTube Music & Premium, YouTube TV, Sunday ticket, et cetera. And that monetization, sort of, drives that flywheel back again in terms of attracting new creators, which attracts more viewers, and, kind of, going around.<\/p>

So, those are the, kind of, three legs of our flywheel, if you will. And those are my priorities.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Can we talk a bit about engagement and viewership? I think people are still surprised when they see how large YouTube is on connected TV. You’re the biggest viewing platform by size, much bigger than Netflix at this point. Can you help us unpack what’s driving that consumption on CTV? What’s at the bottom of it?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah, I like to talk about our position in connected TV as really, like, an overnight success that was many years in the making.<\/p>

You know, it has been an area that we’ve been investing in for years now - actually prior to COVID. And that is through product innovation; bringing the magic, immersive nature, interactive nature of YouTube, to connected TVs, which was pioneering at the time, partnerships with device manufacturers, OEMs, et cetera, and that’s really been a big area of investment for us to make the viewing experience first class on connected TVs.<\/p>

But as you point out, we’ve been the number one streamer in the U.S. for the last couple of years on connected TVs. The last couple of months, it’s really been across streaming, broadcast, and cable, all combined, in terms of the number one distributor.<\/p>

And over a billion hours of engagement time, watch time, happens on connected TVs all over the world. And in the U.S., a few weeks ago, we announced that it’s the primary way that people consume YouTube.<\/p>

So, you know, you often think about YouTube as what’s in your pocket on your mobile phones. Of course, that is an important and growing surface for us, but connected TVs now are the primary way that people watch YouTube in the home. So, that has been a big priority for us, and a real area of growth.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> You mentioned Shorts before. I know that’s a priority, as you said. Can you give us an update on viewership trends in Shorts, and what’s driving the growth? I know that’s been a pivot for you all.<\/p>

Neal Mohan, CEO of YouTube<\/strong>: Yeah. Really, what I would say about Shorts, so, we’ve seen about 20% year-on-year growth in engaged views in Shorts, as of Q1. So, very strong continued momentum in terms of the viewer side.<\/p>

So, what that tells me is that, that is a format that our viewers enjoy and want to consume. They do it alongside traditional, sort of, long-form content on YouTube, so it’s all really part of the experience.<\/p>

And I would say that a couple things really drive that, to your question. The first is, especially for younger audiences, viewing video is increasingly participatory in nature. They want to jump in themselves and participate in that creation process. And Shorts just makes that easy and straightforward. So you open up the app, you hit that plus button at the bottom of YouTube, and you can start making a Short. So, that’s one.<\/p>

The second is that it’s like, building on that, it’s an on-ramp for creativity on YouTube. We have some of our biggest creators today starting as Shorts creators. So, Alan Chikin Chow; I mentioned studios in Hollywood. He has a 10,000-square-foot studio in L.A., produces amazing content, employs a lot of people. He started as a Shorts creator. Adam W is another example of that.<\/p>

In fact, 70% of channels uploading to YouTube, upload Shorts.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Cool. And then you touched on this, too, podcasts. You’ve called out that as an area you’re seeing a high level of user engagement, right? What’s the opportunity with podcasts? I know we’re all focused on it. So, give us your sense of how big the opportunity is there for you.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I mean, podcasts have certainly been in the Zeitgeist for the last few months. And again, just like I said on the connected TV side, it’s one of those sort of overnight successes at YouTube that’s been years in the making, because we’ve been thinking about it for a long time, and we have now over a billion users every month consuming podcasts on YouTube. So, incredibly proud of the success there, both on behalf of viewers, but also our podcasters.<\/p>

I would say a couple things that have been driving that on YouTube. The first is, turns out that lots of viewers don’t want to just listen to podcasts, they want to watch them. We first saw that, obviously during COVID when everybody was at home, but that trend has really continued.<\/p>

In fact, lots and lots of podcast content on YouTube is watched in the living room on big screens. So, video is really, turns out, incredibly important for podcasts.<\/p>

The second is discovery. So, really helping podcasters grow their audience, which of course is our bread and butter with our traditional creators, and so that just really works for podcasters.<\/p>

And then the third and final piece is that we’ve really invested in the podcast listening or viewing experience, both in the YouTube main app, but also in the YouTube Music app. So, those have been drivers of it.<\/p>

And now there’s a real ecosystem, just like there is for creators. Everything from Joe Rogan to Alex Cooper to Rotten Mango to every sort of genre of podcast that’s out there.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> You mentioned how important creators are to your business. We have a panel later today, a cheap plug on that at 1:30pm, on the creator economy. So can you talk a bit about the competition for creators? So, you guys are clearly the biggest. What are you seeing in terms of competition, and what are you doing to make sure that that creative community stays with you and is happy to always work with YouTube?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. And I ran into Colin and Samir yesterday. I think that’s going to be a great session. Their insights are always super, super interesting.<\/p>

I would say every time I talk to creators, no matter where I am in the world, whether it’s L.A., I was in Mumbai a couple weeks ago, they really view YouTube as their home. It is the home base from which all of the opportunities that they have outside of YouTube derive.<\/p>

And, in fact, Jimmy Donaldson, MrBeast, was at our upfront last night, and he has in his offices, kind of, these five rules of success and the number one pillar he has is: YouTube first. Because he knows that all of his success, obviously on YouTube -- he’s our biggest creator -- but off YouTube, really derives from his investment and continued focus on YouTube, above and beyond everything else.<\/p>

And I hear that repeatedly from our creators.<\/p>

As I said, these creators - YouTube really is the epicenter of culture today, all over the world, especially amongst young viewers, and that stems from what our creators are doing. So, you know, it stands to reason that other services, et cetera, are interested in them, because they really are setting the culture.<\/p>

And what we do for them is what I said earlier, Michael, which is focused on two things: Helping them build their audience and community - they know that their most authentic, most engaged fans are on YouTube, that’s home base for them, so continuing to grow that.<\/p>

And then the second, of course, is monetization. We have always prided ourselves in the fact of being this creator economy. I think from 2021 through 2023, which is the last time we looked at this, paid out over $70 billion to creators, partners, our ecosystem there, and over the last ten years, that number has grown every single year.<\/p>

And so growing audience and then growing the business is why creators feel like YouTube is their home.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> So, the last time you were here, it was early days, but this is the question we get more and more. What do you think the future development application of multimodal gen AI will do for your creator universe? So you see the tools that are coming out, what are you thinking the impact is going to be on the business?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I think that’s a super interesting question. As you can imagine, Michael, that’s obviously lots of conversations within YouTube of that, every single day.<\/p>

The first thing I’ll say on that is that’s not a new area of focus for YouTube. We’ve been investing in AI for years and years, everything from what you experience when you open up the app on your phone, on your television, in terms of the recommendations that you see, has been AI-powered. A lot of our content policy enforcement, AI-powered.<\/p>

Tools like Content ID that enforce rights on YouTube, investment in AI. So, we’ve been doing that for years.<\/p>

In terms of new areas that I’m excited about, particularly for creators, is creation itself. So, when you, again, open up the app, hit that plus button, you’re seeing more and more applications of AI there.<\/p>

A couple of examples that I’m very excited about is a product called Dream Screen. That is being able to, in a matter of seconds, typing in a text prompt into YouTube and generating an image or a video, using -- and this is the collaboration between YouTube and Google DeepMind, taking their Veo model and incorporating it into features on YouTube.<\/p>

So, creation is an area of strength for us, and that’s where AI and our investment there is going to pay off.<\/p>

The other thing that creators are really excited about is, again, growing their audience, distribution. So, one really powerful example of AI there is something that we call multi-track audio.<\/p>

So, today, given the global nature of YouTube, one of the biggest barriers of connecting a creator, or a creative idea, with their audience, regardless of where they are in the world, is language. Well, what if we could actually take every video on YouTube and translate that into, not just a couple of languages, but many, many languages, and do it at such high fidelity, capturing the creator’s voice, et cetera. That’s a really powerful application of AI that creators are excited about.<\/p>

And then the final piece is back to where I started, which is things like recommendations. By investing in Gemini, we can have a deeper understanding of the video, and the viewer of the video, and combine those things to actually provide much better recommendations, particularly in scenarios where the viewer is a casual viewer, where we might not have lots of watch history, for example, or other information.<\/p>

And so, improving recommendations, and therefore improving the product experience of YouTube, using Gemini is a fundamental use case of AI that I’m excited about.<\/p>

Michael Nathanson (MoffettNathanson)<\/strong>: The thing about technology, it happens gradually. You’ve been investing forever, and then, suddenly. So do you think we’re at the dawn of this new age of -- you know, kind of the creator world as they start discovering more and more tools, right? We’re all waiting for that explosion point in terms of the better and better content generation from these creators.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. The way I like to describe it, in terms of YouTube’s position there is, we’re in this sort of, kind of, very unique position which is on the one hand, we invest deeply in this technology; collaborations with Google DeepMind, investment in Gemini, and those use cases on YouTube.<\/p>

On the other hand, we are facing and working very closely with the creative industry every single day. And so, I really view AI as a technology that is going to empower human creativity. It is going to put these tools in the hands of a lot more people, and I think we’re going to see, therefore, kind of a renaissance in terms of creativity itself; storytelling that’s going to be powered by AI.<\/p>

Michael Nathanson (MoffettNathanson): <\/strong>Got it. So, that’s the engagement piece. It’s going really well. Let’s talk about monetization, which is going well as well.<\/p>

Shorts monetization. Can you share an update on how YouTube Shorts has performed on engagement? And also, it’s been called out as a headwind to monetization. What have been the challenges there, and what factors do you need to solve for to drive further monetization?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I mean, so the first part of that puzzle, of course, is what we just talked about, which is engagement in viewership. And, as I said, 20% growth in engaged views as of Q1 2025. So despite our numbers there, that growth continues, really, all over the world, because it is a format that viewers really appreciate. So that’s the first thing.<\/p>

In terms of then the next layer of monetization, it’s really about the fact that Shorts allows for, on average, more ad opportunities because of the feed nature of the product. But also, this is where some of the AI pieces come in, in terms of investing in the right ad products. So, using AI for advertisers to be able to take creative that already exists, and translate it to that Shorts format, as one example.<\/p>

AI for better targeting, so improving monetization as a result of better ads products is important. And this is something that we’ve been at work on for, as you know, for a couple of years now. I’ve seen really nice success.<\/p>

In fact, we recently hit a big milestone for Shorts, which is in a number of countries, including the U.S., the revenue per watch hour, so kind of our core RPH metric, monetization rate metric, is now equal to what it is for traditional in-stream on YouTube. And, in fact, in some places it’s ahead.<\/p>

And so really, really excited about that. It’s something that we have been working on for a while, and it’s a testament to both the viewer side, but also the quality of the ad products that we build for our advertisers.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> So, let’s talk about the advertisers for a second. Can you give us any update on your progress of driving more performance-based advertisers, becoming less reliant on Brand?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I mean, that also has been a multi-year effort for us. In fact, in our most recent results, the 10% year-on-year growth in YouTube Ads, driven by direct response, followed by brand. So performance is definitely a core part of our portfolio that we offer advertisers.<\/p>

Of course, you know, we have such a variety of surfaces and use cases and formats across YouTube, that our goal is to be able to cater to whatever use case the advertiser has. Everything from connected TVs, where brands can tell their stories about their brands and what they stand for through our non-skippable ad formats, to everything that I just talked about in terms of Shorts monetization, and everything in between.<\/p>

So we are working on both brand as well as direct response.<\/p>

I’ll just give you two very quick examples. Just last night on the brand side, we announced a sponsorship package where around key cultural moments, where as I said many of them happen on YouTube; whether it’s the Met Gala, whether it’s, you know, the PGA Championship, or what have you. You can get a takeover where your brand shows up in YouTube search results. You have meaningful share of voice across all the content that is generated around that moment. You can do channel takeovers there as well. And so that’s something that our brands are very excited about.<\/p>

Also, formats like using QR codes or shoppable connected TV, where through a QR code you can see something on your television screen and be able to actually then consummate the purchase on your phone.<\/p>

So, really trying to innovate across the entire funnel for advertisers, both on connected TVs, but also on Shorts.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> So that was one of my questions to ask you about action-oriented campaigns on CTV, because personally I like to be in the environment of watching something and not leaving. So you’re solving for that by using a phone versus going to click to some destination, right?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> So it’s more multi-screen, in that case.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> And by the way, that happens. That reduces the friction, because it is just simply, just like you see here, just like on the QR code there, it’s very simple to actually, you know, make that click happen. And so, that’s one example.<\/p>

Another example, is something that we have been -- we announced a few months ago -- we’ve been working on, called Pause ads. So, that’s the idea that when you’re on your living room screen and you pause the video that you’re watching, there’s a squeezeback type of experience for users, and then you can see an ad that’s playing. And so that’s another example of a use case that, you know, brands are interested in, but also performance advertisers are interested in. So you should expect that type of innovation.<\/p>

Michael Nathanson (MoffettNathanson)<\/strong>: So let’s talk about AI in ads. You talk about how it’s helping other parts of the ecosystem for YouTube. Given the massive number of impressions that are generated on YouTube, how are you adding value through to those impressions, through technology, to support healthy pricing for your creators and to drive better ROI for your advertisers? So what have been the innovations using AI?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. So, the first is, just like I described, the use of AI for creation amongst creators. You -- I’m seeing that on the advertiser side as well. So, how do we make that creation process -- ultimately, it’s about that creative that pulls in all of us as potential consumers-- easier and more powerful through AI.<\/p>

So, being able to take a creative concept or asset that you have and turn it into all of these different formats and surfaces across YouTube, in a very seamless manner.<\/p>

And so that is a, I think, very compelling use of AI, and can shave, you know, lots and lots of time and effort off of that creative process. So, that’s one area.<\/p>

The second is on the targeting and quality side of the ads itself. So better targeting, more efficient targeting. That has been an area that we have been investing in. A big area of focus connected to your earlier question, Michael, on performance advertising, is our campaign type called Demand Generation (Demand Gen) and that is using AI to improve the efficiency and efficacy of the ad campaigns that run across YouTube.<\/p>

And we’ve seen a 26% improvement in cost [conversions] per dollar year-on-year as a result of these investments, including investments in AI. So those are a couple of examples on the creation side, but also on the targeting side where AI plays a big role.<\/p>

Michael Nathanson (MoffettNathanson): <\/strong>Okay. A question you don’t get that often is ad load. So do you think there’s room to increase the ad load without harming consumer experience across all your touch points?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. So, the first thing I’ll say, and you know, before my time at YouTube, I was responsible for a lot of our ads products at Google.<\/p>

So I think about this a lot, and I would say the rule has always been: focus on the user experience first. And that, in my experience, is not contradictory with advertiser ROI, or what have you. So we really always start with that. That is about ad load, that’s about ads quality, all of those things, and that is the fundamental principle at YouTube, which is: it has to be something that is relevant and useful and interesting to our users.<\/p>

Having said that, like I said, I don’t think that’s contradictory with delivering results for our advertisers. In fact, I think they’re self-reinforcing.<\/p>

And a very concrete example of that is what we have been working on, on connected TVs, on living room devices, around advertising. And so, you know, when you’re in that mode; when you’re sitting on your couch and watching YouTube in sort of that lean-back mode, what if we could actually have fewer ad interruptions, but do it in a way where they are deeper.<\/p>

So, pods. So deeper pods, fewer interruptions. And so that is an example of one that allowed us to actually increase the number of ads, you know, per hour, however you want to measure it, but also improve user satisfaction. So, those two things both rose as a result of that. And that’s an example of how we think about user quality and advertiser results hand in hand.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Right. You don’t want to kill the golden goose. I can tell you all about that in media. Talk to you about subscriptions. You guys have done a great job growing that business. I know you’re very proud of how big it’s become. We’re a YouTube TV family. Many people in the room love YouTube TV, so let me ask you about that.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Send me your feature requests.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> I have them. More Ranger playoff games. You can’t control that. So, we expect YouTube TV to be the single-biggest Pay TV provider in three years’ time. We could be wrong. Could be two years’ time.<\/p>

So with that said, we have a few questions that we always debate inside our firm, right? Why not cull the channel line-up into a more targeted sports news bundle and drop many of the legacy cable networks that are no longer being funded adequately by their parent companies?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I mean, I guess what I would say there, Michael, is just kind of going back to the origin of YouTube TV and why we started it in the first place. It really was about reinventing, sort of, that legacy or traditional TV experience. I am a sports lover. I love watching sports. How would I want that television experience to be?<\/p>

And so the reason I always like to start with that is because you should think about how we invest in YouTube TV through that lens; which is really through the product innovation lens, and that is the way that we’re going to look at it. That’s where our success comes from. We have over 8 million subscribers on YouTube TV.<\/p>

And so features like Multiview, Key Plays, those are areas that you should continue to see us invest in. In fact, you know, one of the feature requests we get is people love Multiview, they want more choice. So experimenting around more user choice around those types of things.<\/p>

And so that’s what I think; ultimately, it’s that product and feature innovation, as opposed to specific channel lineups for example, that I think are important to our growth, and that’s really the way that you should expect us to look at that product.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> How about the move to skinnier bundles? If you tested the room, we all want 50 channels, $50 bucks, right? That’s something that I think we’d all sign up for. So how do you think about offering a cheaper, skinnier bundle at a lower price?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I probably don’t have anything to say on that today. I mean, we’re always looking at what our channel mix looks like. We want to deliver the best value to our subscribers. We get feedback on a regular basis.<\/p>

But I have to tell you, it really oftentimes comes back to the product experience itself, the features themselves. Of course, we’re there to watch the content. But how you watch the content I really think is important to users. And so that’s a big area of focus for us.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Not to joke, but the features you’ve introduced, it’s a great product, right? And people who have it swear by it. And once you sample it, you can never imagine people going back to the old world.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> We’re very proud of that product.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Yeah, it’s great.<\/p>

On that point, let’s talk about Sunday Ticket and sports rights. This is going to be the third year carrying the Sunday Ticket. You just announced a big deal with the NFL for the first game of the year this year.<\/p>

Has the product met your expectations? And maybe you can talk about why and how you’re thinking about this new game that you’re adding.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. So, I mean, I think they’re related in some ways. And so, we’re very, very excited about our partnership with the NFL, this exclusive game that’s going to be carried on YouTube during kickoff weekend, the Brazil game. We announced the match-up last night actually at our Upfronts. Roger came and announced it, Chargers versus the Chiefs. So, super, super excited about that.<\/p>

And I think, at least what I’m particularly excited about, because this is what played out with Sunday Ticket, is that we are going to do it in a uniquely YouTube way.<\/p>

And so, it will be on YouTube, YouTube TV. The game is going to be available in front of the pay wall to billions of users all over the world, and so I’m very excited about that. I know the NFL is extremely excited about that, sort of, global reach that YouTube will be able to provide there.<\/p>

And tying it back to your Sunday Ticket question, I would say we’d like to do with this game, what we have done with Sunday Ticket, which is product and technology innovation. That’s what YouTube stands for. So, things like Multiview. How do we enhance the actual football watching experience, sports watching experience because it’s on YouTube? That’s super, super important.<\/p>

Because we want to super-serve those sports fans that are on YouTube. We have 35 billion hours of watch time of sports content on YouTube annually. You know, consumption of sports on Living Room in YouTube is growing 30% year-on-year. And so we want to super-serve those fans.<\/p>

The second thing that I will say is; our creators. What makes watching sports like the NFL Sunday Ticket on YouTube particularly unique is our creator ecosystem. And to the NFL’s credit, they have really leaned into that.<\/p>

And so one small example is this idea of Watch With. So, you know our sports fans, particularly young sports fans, love their favorite creators, sports creators, or what have you. What if you could actually watch your favorite game alongside your favorite creators? And that turns out to actually be a winning product combination.<\/p>

In fact, in Brazil, speaking of this Brazil NFL game, we carry live soccer matches there and we did a partnership with a big YouTuber, CazéTV. And it turns out that that is not just a delightful experience when you watch it alongside Cazé, but it also drives viewership, because you are now inheriting Cazé's huge audience as well. And so, whether it’s the Brazilian domestic leagues or FIFA, they really lean into that creator integration.<\/p>

So, that’s been our experience with Sunday Ticket. I’m very happy with how that experience has been going. I know the NFL is very happy with Sunday Ticket on YouTube, and so you should expect to see, you know, a continuation of that.<\/p>

Michael Nathanson (MoffettNathanson): <\/strong>On that point, do you expect other leagues? You know, we had the NBA here yesterday, some leagues are being challenged by the RSN model being challenged in itself.<\/p>

So, what do you think is the possibility of working with other leagues on products like Sunday Ticket and league passes? Is that something that you think will happen and you have tolerance for?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> I mean, we’re very focused on making our existing partnership successful. When we make a bet, we really want to see them through and be a success for the partners, but most importantly, for our joint fans. And so, that’s our focus.<\/p>

You know, we’ll look at sports opportunities through those lenses that I described. Does it super-serve our fans? Is there some unique technological innovation that we can bring to it? And how do we enhance and integrate our creator ecosystem to make that a better experience?<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> And then going back to the NFL game, appetite for other things like that, putting it in front of a pay wall? This is the first major one of its kind, but is this a test case for you to see how well can we scale this and how well we monetize it?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. We’re always learning every time we try these new things. Our kind of mantra at YouTube is we want to continue to push the frontier in terms of creativity and entertainment and culture, and this NFL game is squarely another example of that.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> So going back to subscriptions, the NFL Sunday Ticket was an important way for YouTube to enter the channels business, with Primetime Channels. Can you talk about your ambitions here? And no one is in a better position than you, I believe, to be an aggregator of all these channels in one place. So, how are you seeing this market develop and what are the gaining factors?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. So for those of you that aren’t familiar, Primetime Channels is our a la carte video service subscription capability within the main app of YouTube. Sunday Ticket is an example of that. So one of the innovations we brought to Sunday Ticket is you could buy it as part of an add-on to YouTube TV of that bundle, but you could also buy it a la carte, as a standalone SKU in Primetime Channels.<\/p>

And so, that business is a relatively new one for us. We are investing in it for, back to kind of the overall vision that I described right at the top, which is we want to serve all of those video use cases; everything from 15-second Shorts to, you know, four-hour NFL games, to 15-hour gaming livestreams. And so having Primetime Channels is a way for us to accomplish that on the user side.<\/p>

We have 45 channels now, really spanning the gamut of video subscription services, and we’re happy with the response so far, but it’s a relatively new business for us. And you’re right, Sunday Ticket was an important part of that.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Can we talk about another subscription business, which doesn’t get as much attention maybe, but it’s larger: YouTube Music and Premium. You announced 125 million subscribers. Can you talk about what’s driving that growth, what regions of the world are the most important to you, and just give us a sense of anything under the hood on that, because it’s such a large business right now.<\/p>

Neal Mohan, CEO of YouTube: <\/strong>Yeah. I mean, look, that is a business that we’ve been investing in for a very long time, nearly a decade. And you mentioned the milestone of 125 million subscribers. That is a global product, we want to continue to invest in it, everywhere.<\/p>

The way that we look at that is; first and foremost, it’s just about user choice. Can we provide an offering? This was you know, when it started it was ad-free, background, offline as the features that you get for all of your YouTube content on the main app, on the Music app, catering in particular to music lovers on YouTube. That’s obviously a very big vertical on YouTube.<\/p>

But we’ve added dozens of features since the initial launch. We’re going to continue to add features: higher quality audio, faster playbacks, up to 4X playbacks for Premium subscribers. So continuing to innovate in terms of user choice and user value, we’re adding there. That allows us to match price with the value that we’re providing as well. So, I’m very happy about that.<\/p>

Building on that, we want to add new SKUs. So one new SKU that I’m very excited about is called Premium Lite, so that is a more affordable subscription SKU, where you get the ads-free experience on the non-music part of the YouTube corpus of videos, and so we’re seeing if that introduces a price point and an offering that works for consumers. So, continuing to innovate in that space.<\/p>

And it turns out that when we have a Premium user, that is a user that contributes more back to our creator ecosystem, to our partners, to YouTube’s business. So kind of the gross profit profile of that type of a user is meaningfully better than it is on just an ads-alone type of a user. So, that’s why we’re very happy about that business.<\/p>

Michael Nathanson (MoffettNathanson): <\/strong>Okay. So, in our last question, let’s get to profitability. Can you talk a bit about how you think about managing the business from a financial and returns perspective?<\/p>

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I mean, in order to keep that flywheel that we talked about at the start, really working for our ecosystem of creators and advertisers and viewers, it’s really important to think about our business in a very disciplined way.<\/p>

And so, it starts, first and foremost, with making long-term bets, investing long-term bets, so everything from, you know, a lot of them that we talked about. The Living Room, podcasts, Shorts. We’re going to continue those investments. AI, that’s really, really important to the long-term growth.<\/p>

Then of course, revenue and monetization. We just announced on our Q3 ’24 earnings call that overall revenue of YouTube is over $50 billion. That’s up from the $40 billion that we announced here with you back in 2023. So, continued focus on revenue across AVOD, SVOD, we’ve talked about, but also new areas like shopping, channel memberships, direct fan funding opportunities. So, trying to grow that piece.<\/p>

But also focus on things like on the gross margin side.<\/p>

So, just a quick example of that is, for example, the revenue share that we offer on Shorts is different than it was on, sort of, traditional VOD. And the reason is it’s a reflection of the creation costs, et cetera, that go into Shorts, but it results in an improvement on the gross margin side.<\/p>

And then in terms of further down the statement, in terms of just overall, sort of, operating expenses, of course we want to continue to be disciplined there. So, moderating things like headcount growth, vendor costs, using AI, back to your point around AI, around efficiencies.<\/p>

So, that’s really how we look at this, and all of these things result in our contribution back to Google Services. So, that’s how I think about growing the business and financial discipline all at the same time.<\/p>

Michael Nathanson (MoffettNathanson):<\/strong> Well Neal, thanks for being here. We really appreciate it. Keep on going.<\/p>

Neal Mohan, CEO of YouTube:<\/strong> All right. Thank you. Thanks, everybody. Thanks, Michael.<\/p><\/div>","DocumentFileSize":"247 KB","DocumentFileType":"PDF","DocumentPath":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/neal-mohan-moffettnathanson-transcript-05-15-25.pdf","EventId":860,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"00000000-0000-0000-0000-000000000000","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2025\/Neal-Mohan-Chief-Executive-Officer-of-YouTube-at-the-MoffettNathanson-Media-Internet-and-Communications-Conference-on-May-15-2025\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"24d3fd1e-8351-4dda-a276-dd6564cf0fba","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"","ReportYear":"","RevisionNumber":39902,"SeoName":"Neal-Mohan-Chief-Executive-Officer-of-YouTube-at-the-MoffettNathanson-Media-Internet-and-Communications-Conference-on-May-15-2025","TagsList":null,"TimeZone":"PT","Title":"Neal Mohan, Chief Executive Officer of YouTube, at the MoffettNathanson Media, Internet, and Communications Conference on May 15, 2025","WebCastLink":"","WorkflowId":"3c14660c-ace4-4ff5-ad99-e06ac0a7cebb","EndDate":"05\/15\/2025 09:00:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"05\/15\/2025 08:20:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"Alphabet 2025 Q1 Earnings Call","Type":"Video","Url":"https:\/\/www.youtube.com\/watch?v=BtXRNTgsgpU"}],"Body":"

Transcript<\/div>

For a PDF version of the transcript, please click here<\/a>.<\/p>

This transcript is provided for the convenience of investors only, for a full recording please see the <\/i>Q2 2025 Earnings Call webcast.<\/u><\/i><\/a><\/p>

Operator: <\/b>Welcome, everyone. Thank you for standing by for the Alphabet Second Quarter 2025 Earnings Conference Call.<\/p>

At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/p>

I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations.<\/p>

Please go ahead.<\/p>

Jim Friedland, Head of Investor Relations: <\/b>Thank you. Good afternoon, everyone, and welcome to Alphabet’s Second Quarter 2025 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler, and Anat Ashkenazi.<\/p>

Now, I’ll quickly cover the Safe Harbor.<\/p>

Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement.<\/p>

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>

Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>

And now, I’ll turn the call over to Sundar.<\/p>

Sundar Pichai, CEO, Alphabet and Google: <\/b>Thanks, Jim.<\/p>

Good afternoon, everyone.<\/p>

Q2 was a standout quarter for us, with robust growth across the company. As you saw at I\/O, we are leading at the frontier of AI and shipping at an incredible pace. AI is positively impacting every part of the business, driving strong momentum.<\/p>

This quarter, Search delivered double-digit revenue growth. Our new Search features continue to perform well. AI Mode has launched in the U.S. and India, and is going well. While AI Overviews now has over 2 billion monthly users across more than 200 countries and territories and 40 languages. I’ll give some more details on Search in a moment.<\/p>

We continue to see strong performance in YouTube, as well as Subscriptions, reflecting great momentum across these high-growth businesses. In the U.S., Shorts now earn as much revenue per watch hour as traditional in-stream on YouTube, and in some countries, it now even exceeds in-stream’s rate.<\/p>

Cloud had another great quarter of strong growth in revenues, backlog, and profitability. Its annual revenue run rate is now more than $50 billion. We are seeing significant demand for our comprehensive AI product portfolio.<\/p>

Of course, this is all possible because of the long-term investments we’ve made in our differentiated, full-stack approach to AI. This spans AI infrastructure; world-class research, models and tooling; and our products and platforms that bring AI to people all over the world.<\/p>

I’ll briefly touch on the AI stack before turning to quarterly highlights.<\/p>

First, AI infrastructure. We operate the leading global network of AI-optimized data centers and cloud regions.<\/p>

We also offer the industry’s widest range of TPUs and GPUs, along with storage and software built on top. That’s why nearly all gen AI unicorns use Google Cloud. And it’s why a growing number, including leading AI research labs, like Safe Super Intelligence and Physical Intelligence, use TPUs specifically. Our AI infrastructure investments are crucial to meeting the growth in demand from Cloud customers.<\/p>

Next, world-class AI research, including models and tooling.<\/p>

We continue to expand our Gemini 2.5 family of hybrid reasoning models, which provide industry-leading performance in nearly every major benchmark.<\/p>

In addition to improving our popular workhorse model Flash, we debuted an extremely fast ‘Flash-Lite’ version.<\/p>

We achieved gold-medal level performance in the International Math Olympiad, using an advanced version of Gemini with Deep Think. We can’t wait to bring Deep Think to users soon.<\/p>

We have some of the best models available today at every price point. Our 2.5 models have been a catalyst for growth, and nine million developers have now built with Gemini.<\/p>

I also want to mention Veo 3, our state-of-the-art video generation model. It’s been a viral hit, with people sharing clips created in the Gemini app, and with our new AI filmmaking tool, Flow. Since May, over 70 million videos have been generated using Veo 3.<\/p>

And we recently introduced a feature in the Gemini app to turn photos into videos, which people absolutely love. It’s also rolling out to Google Photos users starting today.<\/p>

Third, our products and platforms. We are bringing AI to all our users and partners through surfaces like Workspace, Chrome, and more. The growth in usage has been incredible.<\/p>

At I\/O in May, we announced that we processed 480 trillion monthly tokens across our surfaces. Since then, we have doubled that number now processing over 980 trillion monthly tokens, a remarkable increase.<\/p>

The Gemini app now has more than 450 million monthly active users and we continue to see strong growth and engagement, with daily requests growing over 50% from Q1.<\/p>

In June alone, over 50 million people used AI-powered meeting notes in Google Meet.<\/p>

And powered by Veo 3, our new short video product in Workspace called Google Vids reached nearly one million monthly active users.<\/p>

This month at Samsung Galaxy Unpacked, we announced new Android and AI features that are available on Samsung’s latest devices.<\/p>

And we are really pleased with the growth in Subscriptions, which got a boost from our Google AI Pro and Ultra plans.<\/p>

Now, some key highlights from Search, Cloud, YouTube, and Waymo for the quarter.<\/p>

First up, this is an incredibly exciting moment for Search. We see AI powering an expansion in how people are searching for and accessing information, unlocking completely new kinds of questions you can ask Google.<\/p>

Overall queries and commercial queries on Search continued to grow year-over-year. And our new AI experiences significantly contributed to this increase in usage.<\/p>

We are also seeing that our AI features cause users to search more as they learn that Search can meet more of their needs. That’s especially true for younger users.<\/p>

Let me go deeper on our new Search experiences.<\/p>

We know how popular AI Overviews are because they are now driving over 10% more queries globally for the types of queries that show them, and this growth continues to increase over time. AI Overviews are now powered by Gemini 2.5, delivering the fastest AI responses in the industry.<\/p>

We also saw strong growth in the use of multimodal Search, particularly the combination of Lens or Circle to Search, together with AI Overviews. This growth was most pronounced among younger users.<\/p>

Our new end-to-end AI Search experience, AI Mode, continues to receive very positive feedback, particularly for longer and more complex questions. It’s still rolling out but already has over 100 million monthly active users in the U.S. and India.<\/p>

We plan to keep enhancing the AI Mode experience for users by shipping great features, fast. That includes our advanced research tool Deep Search and more personalized responses.<\/p>

Next, Google Cloud.<\/p>

We see strong customer demand, driven by our product differentiation and our comprehensive AI product portfolio. Four stats show this.<\/p>

One, the number of deals over $250 million, doubling year-over-year.<\/p>

Two, in the first half of 2025, we signed the same number of deals over $1 billion that we did in all of 2024.<\/p>

Three, the number of new GCP customers increased by nearly 28% quarter-over-quarter.<\/p>

Four, more than 85,000 enterprises including: LVMH, Salesforce, and Singapore’s DBS Bank now build with Gemini, driving a 35x growth in Gemini usage year-over-year.<\/p>

Our models are served on our AI infrastructure, which offers industry-leading performance and cost efficiency for both training and inference.<\/p>

Along with our AI accelerators, we introduced new innovations in storage, including Anywhere Cache, which improves inference latency by up to 70%; and Rapid Storage, which delivers a 5x improvement in latency compared to leading hyperscalers.<\/p>

In addition, we have optimized AI software packages, including PyTorch and JAX, with full open source supports for various AI training and serving demands.<\/p>

We have also integrated AI agents deeply into each of our Cloud products.<\/p>

Wayfair is leveraging our databases integrated with AI to streamline data pipelines and deliver more personalized customer experiences.<\/p>

Mattel is leveraging our Gemini-powered Data Agents and Big Query to review and act on product feedback more quickly.<\/p>

Target is using our Gemini-powered Threat Intelligence and Security Operations Agents to improve cybersecurity.<\/p>

Capgemini is utilizing our AI Software Engineering Agents to deliver higher quality software faster by automating tasks, from code generation to testing.<\/p>

And BBVA says Gemini in Google Workspace is saving employees nearly three hours per week by automating repetitive tasks. It is now rolling it out to 100,000 employees globally.<\/p>

We are also focused on building a flourishing AI agent ecosystem.<\/p>

We introduced an open source Agent Development Kit which now has over a million downloads in less than four months.<\/p>

We also introduced Agentspace, an open and interoperable enterprise chat, search and agent platform. Gordon Food Service is bringing Agentspace to its U.S. employees, which is enabling better, more efficient decision-making. And over one million subscriptions have been booked for Agentspace ahead of its general availability.<\/p>

Turning now to YouTube. Nielsen data shows YouTube has led U.S. streaming watch time for over two years. A generation that grew up with YouTube on their devices is now increasingly watching their favorite creators and content on their televisions.<\/p>

That includes billions of sports fans, too. Globally they consume more than 40 billion hours of sports content on YouTube annually. And in September, we’ll stream the NFL’s first Friday game of the season, live from Brazil. From Sports to Shorts, we now average over 200 billion daily views on YouTube Shorts.<\/p>

AI is helping improve our recommendations and Auto Dubbing, which translates to better returns for creators and brands by dramatically increasing the potential audiences they can reach. And today, we began rolling out a whole raft of new AI tools for creators on YouTube Shorts.<\/p>

Finally, YouTube continues to diversify its subscription options, recently expanding its Premium Lite offerings to 15 new countries, with more to come.<\/p>

And lastly, Waymo continues to scale and expand to safely serve more riders in more places.<\/p>

Last month, Waymo launched in Atlanta, more than doubled its Austin service territory, and expanded its Los Angeles and San Francisco Bay Area territories by approximately 50%.<\/p>

Waymo also launched Teen Accounts, starting with riders aged 14-17 in Phoenix.<\/p>

Overall, great momentum here. The Waymo Driver has now autonomously driven over 100 million miles on public roads. And the team is testing across more than ten cities this year, including New York and Philadelphia. We hope to serve riders in all ten in the future.<\/p>

As I said, a standout quarter. A big thank you, as always, to our employees and partners for an amazing Q2.<\/p>

Philipp, over to you.<\/p>

Philipp Schindler, SVP and CBO, Google: <\/b>Thanks, Sundar. And hello, everyone.<\/p>

I’ll quickly cover performance for Google Services for the quarter, then structure the rest of my remarks around the great progress we are delivering across Search, Ads, YouTube, and Partnerships.<\/p>

Google Services revenues were $83 billion for the quarter, up 12% year-on-year, driven by strong growth in Search and YouTube, partially offset by a year-on-year decline in Network revenues.<\/p>

To add some further color to our results, the 12% increase in Search and Other revenues was led by growth across all verticals, with the largest contributions from Retail and Financial Services.<\/p>

YouTube saw similar performance across verticals. Its 13% growth in advertising revenues was driven by Direct Response, followed by Brand.<\/p>

Starting with Search and Other revenues, which delivered over $54 billion in revenue for the quarter.<\/p>

Shifts like AI are what propels our industry forward. Gemini’s native multimodality is helping bring the offline audio and visual world back into the online world, creating a number of opportunities for Search. Let me share a few examples.<\/p>

Take visual queries. Google Lens searches are one of the fastest growing query types on Search and grew 70% since this time last year. The majority of Lens searches are incremental, and we are seeing healthy growth with shopping queries using Lens. And you can obviously take this to the next level by moving from image to video-based capabilities, like ‘Search Live’.<\/p>

And then there’s Circle to Search, which is now on over 300 million Android devices. We’ve been adding capabilities to help people explore complex topics and ask follow-up questions without switching apps. For example, gamers can now use Circle to Search while playing mobile games to see an AI Overview for answers.<\/p>

And just last week, we brought a new, agentic capability directly into Search for all U.S. users with AI-powered calling to local businesses.<\/p>

Finally, Shopping, where in Q2 we introduced a virtual try-on experience for Search Labs users in the U.S. Now people can try billions of clothing products on themselves, virtually. Early results and engagement have been extremely positive, particularly with Gen Z users, and we’ll be bringing this functionality to all U.S. users imminently.<\/p>

All these innovations are opening up completely new ways for people to use technology, bringing the offline world into the online world in ways that simply have not been possible before. Add in our amazing AI translation capabilities and just imagine the possibilities: people can access more content in their language, and businesses - large and small, international or local - can reach even more customers.<\/p>

I’m excited about how all of these elements will come together and the opportunities ahead of us in Search.<\/p>

Moving to Ads, where our strategy to reinvent the entire marketing process with AI is delivering value for our customers and our business.<\/p>

Last quarter, we introduced AI Max in Search, a new suite of AI-powered features in existing Search campaigns. Advertisers that activate AI Max in Search campaigns typically see 14% more conversions.<\/p>

On Media Buying, Smart Bidding Exploration, the biggest update to bidding strategy in a decade, brings better performance to advertisers by allowing them to bid on less obvious, but potentially higher value queries more often. Campaigns using Smart Bidding Exploration see a 19% increase in conversions on average.<\/p>

Demand Gen continues to drive revenue growth and deliver measurable impact for our customers. As an example, Depop, Etsy’s resale clothing marketplace, used a Shorts-only Demand Gen campaign to drive new customers to the site. Shorts drove 80% higher brand lift and doubled click-through rates versus benchmarks.<\/p>

On Creatives, we launched Asset Studio using our latest models to help businesses, large and small, generate creative assets. Small businesses benefit from top quality assets and deployment scaling capabilities, while larger businesses can go faster from proof of concept, to launch, and resize at lower costs. Over 2 million advertisers now use Google’s AI-powered asset generation tools to run ads. A 50% increase on this time last year.<\/p>

Turning to YouTube, where we saw continued strong revenue growth, driven by Direct Response followed by Brand.<\/p>

YouTube creators are connected to the global zeitgeist and trusted by their audiences like no others. As part of Brand Connect, we launched Creator Partnership Hub which allows brands to more easily work with the right creators and tap into cultural moments.<\/p>

We introduced Veo 3, photo to video and generative effects to Shorts, making content creation easier and offering unexplored avenues for creativity.<\/p>

We’re seeing both the volume and the price of ads in Shorts increase, particularly in developed markets. The feed-based nature of the product allows for more ad opportunities on average, and this growth is further supported by ad formats native to Shorts, AI-powered ad creative resizing tools, improved ad targeting, and the rise in viewer engagement.<\/p>

McDonald’s USA harnessed the influence of YouTube creators to ignite awareness for the Minecraft Movie Meal. It leveraged YouTube Shorts partnership ads to increase its reach, generating a 3.3x higher viewthrough rate than the industry benchmark.<\/p>

Finally, on CTV, where the momentum continues. According to The Gauge report by Nielsen, YouTube has been number one in streaming watch time in the U.S. for more than two years, hitting a record high of 12.8% of total TV viewing in June 2025.<\/p>

In the past 12 months, YouTube ads viewed on CTV screens drove over one billion conversions. We saw strong growth in Retail thanks to CTV shopping ads which allows viewers to shop directly via QR codes, helping us leverage direct marketing opportunities.<\/p>

As always, I’ll wrap up with the momentum we are seeing in Partnerships, where our customers increasingly recognize the strength and breadth of Google’s ability to help them transform their business with AI.<\/p>

For instance, a new partnership with PayPal will improve the digital commerce experience for their merchants and customers. PayPal will expand its Google Cloud adoption for AI-driven recommendations, transaction processing, and enhanced security. The partnership also broadens the availability and functionality of PayPal’s payment services and capabilities across a range of Google products.<\/p>

In closing, I’d like to thank Googlers everywhere for their contributions and commitment to our success, and to our customers and partners for their continued trust.<\/p>

Anat, over to you!<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/b> Thank you, Philipp.<\/p>

My comments will focus on year-over-year comparisons for the second quarter, unless I state otherwise.<\/p>

I will start with the results at the Alphabet level, and will then cover our segment results. I’ll end with some commentary on our outlook for the second half of 2025.<\/p>

We have another solid quarter in Q2. Consolidated revenues of $96.4 billion increased by 14%, or 13% in constant currency.<\/p>

Search and YouTube advertising; Subscriptions, Platforms and Devices; and Google Cloud each had double-digit revenue growth this quarter, reflecting strong momentum across the business.<\/p>

Total Cost of Revenues was $39 billion, up 10%.<\/p>

TAC was $14.7 billion, up 10% and Other Cost of Revenues was $24.3 billion, up 10%, with the increase primarily driven by content acquisition costs, largely for YouTube, followed by depreciation.<\/p>

Total operating expenses increased 20% to $26.1 billion. The biggest driver of growth was expenses for legal and other matters, which reflected the impact of a $1.4 billion charge related to a settlement in principle of certain legal matters.<\/p>

R&D investments increased by 16%, primarily driven by increases in compensation and depreciation expenses.<\/p>

Sales and Marketing expenses increased 5%, primarily reflecting an increase in advertising and promotional expenses.<\/p>

Operating income increased 14% this quarter to $31.3 billion, and operating margin was 32.4%. Operating margin benefited from strong revenue growth and continued efficiencies in our expense base, partially offset by the legal charge I mentioned earlier, and a significant increase in depreciation expense.<\/p>

Net income increased 19% to $28.2 billion, and earnings per share increased 22% to $2.31.<\/p>

We generated free cash flow of $5.3 billion in the second quarter, and $66.7 billion for the trailing twelve months.<\/p>

Free Cash Flow in the second quarter was affected by a sizable sequential increase in CapEx and cash tax payments as we make federal tax payments in the second quarter for both Q1 and Q2.<\/p>

We ended the quarter with $95 billion in cash and marketable securities.<\/p>

Turning to segment results, Google Services revenues increased 12% to $82.5 billion, reflecting strength in Google Search and YouTube advertising and subscriptions.<\/p>

Google Search and Other revenues increased by 12% to $54.2 billion. Search and Other revenues delivered growth across all verticals, with the largest contributions coming from Retail and Financial Services.<\/p>

YouTube advertising revenues increased 13% to $9.8 billion, driven by Direct Response advertising, followed by Brand.<\/p>

Network advertising revenue of $7.4 billion were down 1%.<\/p>

Subscription, Platforms, and Devices revenues increased 20% to $11.2 billion, primarily reflecting growth in subscription revenues. This growth was driven by YouTube subscription offerings, followed by Google One, with growth in paid subscriptions being the biggest driver of revenue growth.<\/p>

Google Services operating income increased 11% to $33.1 billion. Operating margin was flat year-on-year at 40.1%, as healthy revenue growth and continued efficiency in our expense base, partially offset by the legal charge I mentioned earlier.<\/p>

Turning to the Google Cloud segment, which delivered very strong results this quarter. Revenues increased by 32% to $13.6 billion in the second quarter, reflecting growth in GCP across Core and AI products, at the rate that was much higher than Cloud’s overall revenue growth, and growth in Google Workspace driven by an increase in average revenue per seat and the number of seats.<\/p>

Google Cloud operating income increased to $2.8 billion, and operating margin increased from 11.3% to 20.7%. The expansion in Cloud operating margin was driven by strong revenue performance and continued efficiencies in our expense base, partially offset by higher technical infrastructure usage costs, which includes the associated depreciation.<\/p>

As we ramp our AI investments, we continue to focus on driving improvements in productivity and efficiency to offset growth in technical infrastructure related expenses, particularly from higher depreciation.<\/p>

Google Cloud backlog increased 18% sequentially in Q2 and 38% year-over-year, reaching $106 billion at the end of the quarter. This growth was driven by strong demand for our products and services from both new and existing customers.<\/p>

As Sundar mentioned, we have signed multiple billion-dollar-plus deals in the first half of the year.<\/p>

As for Other Bets, in the second quarter, revenues were $373 million, and operating loss was $1.2 billion. Within Other Bets, we’re allocating more resources to businesses like Waymo, where we see opportunities to create additional value.<\/p>

With respect to CapEx in the second quarter, our CapEx was $22.4 billion. The vast majority of our CapEx was invested in technical infrastructure, with approximately two-thirds of investments in servers and one-third in data centers and networking equipment.<\/p>

In Q2, we returned capital to shareholders through repurchases of stock of $13.6 billion and dividend payments of $2.5 billion.<\/p>

Turning to our outlook. I would like to provide some commentary on several factors that will impact our business performance in the second half of 2025, as well as an updated outlook for full-year CapEx.<\/p>

First, in terms of revenues, we’re pleased with the overall momentum we’re seeing across the business. At current spot rates, we could see a tailwind to our revenues in Q3. However, volatility in exchange rates could affect the impact of FX on Q3 revenues.<\/p>

As for our segments, in Google Services, advertising revenues in the second half of 2025 will be affected by the following:<\/p>

The continuing lapping of the strength we experience in the Financial Services vertical throughout 2024 and year-over-year comparisons will be negatively impacted by the strong spend on U.S. elections in the second half of 2024, particularly on YouTube.<\/p>

In Cloud, as I mentioned, the demand for our products is high, as evidenced by the continued revenue growth and the Cloud backlog of $106 billion. While we have been working hard to increase capacity and have improved the pace of server deployments, we expect to remain in a tight demand-supply environment going into 2026.<\/p>

Moving to investments, given the strong demand for our Cloud products and services, we now expect to invest approximately $85 billion in CapEx in 2025, up from a previous estimate of $75 billion.<\/p>

Our updated outlook reflects additional investment in servers, the timing of delivery of servers and an acceleration in the pace of data center construction, primarily to meet Cloud customer demand.<\/p>

Looking out to 2026, we expect a further increase in CapEx due to the demand we’re seeing from customers as well as growth opportunities across the company.<\/p>

We will provide more details in the 2026 CapEx outlook on a future earnings call.<\/p>

In terms of expenses. First, as I mentioned on our previous earnings call, the significant increase in our investments in CapEx over the past few years will continue to put pressure on the P&L, primarily in the form of higher depreciation.<\/p>

In the second quarter, depreciation increased $1.3 billion year-over-year to $5 billion, reflecting a growth rate of 35%. Given the recent increase in CapEx investments, we expect the growth rate in depreciation to accelerate further in Q3.<\/p>

Second, as we have previously said, we expect some headcount growth in 2025 in key investment areas. In the third quarter, we expect a sequential increase in total headcount additions due in part to the hiring of new graduates.<\/p>

Third, Q3 will reflect the expense associated with the upcoming August launch of the new Pixel family of products.<\/p>

In conclusion, as you heard from Sundar and Philipp, we’re pleased with the momentum in the business and excited about the pace of innovation. Our full-stack approach, which combines AI infrastructure, AI research and AI products and platforms, positions us well to deliver new products and services across the company.<\/p>

We’re seeing great momentum with our AI efforts as demonstrated by the increase in cumulative tokens processed.<\/p>

Search revenues are seeing healthy growth with features like AI Overviews, AI Mode, and Lens offering new ways for users to access information.<\/p>

Cloud has reached an annual revenue run-rate of more than $50 billion and is delivering margin expansion while continuing to invest to meet customer demand.<\/p>

And YouTube has expanded its addressable market, by building new services like Shorts, which now averages over 200 billion daily views.<\/p>

We’re excited to see the value our products and services are bringing to customers and partners around the globe.<\/p>

Now I’ll turn the call over to the operator, and Sundar, Philipp and I will take your questions.<\/p>

Operator:<\/b> Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>

Your first question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>

Eric Sheridan (Goldman Sachs):<\/b> Thank you so much for taking the question. Maybe one for Sundar and one for Philipp.<\/p>

Sundar, when you think about the journey you’re on with respect to the evolution of products and platforms, how do you think about, sort of, the implications of changed consumer behavior and how investors should think about that from the volume perspective versus the monetization perspective? Because I think there’s a lot of longstanding dynamics out there about clicks and click monetization that might be very different when you look out over the next three to five years.<\/p>

And Philipp, when you think about the evolution of YouTube, you made a number of comments about subscription revenue. I’m just curious about how you think about the mix of advertising versus subscription, and what some of your key learnings might have been as the subscription side of the business continues to scale. Thank you.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Thanks, Eric. Appreciate the question.<\/p>

I do think looking ahead, based on everything we are seeing, people are excited about AI. They are adopting it well across our products. For me, just seeing multimodality, how people have modified their behavior to include images, both through Lens and Circle to Search seamlessly as part of interacting with Google, are early indications that people are going to be adapting to these moments very, very well.<\/p>

I’m trying to understand your question in terms of clicks and click monetization, maybe that’s something Philipp can touch on.<\/p>

But overall, we expect as we build out our organic experiences, we have a good understanding of how to continue iterating on monetization, so that it will work well with organic experiences. But we will lead with organic experience. So in terms of newer surfaces like Gemini app, et cetera, we’ll focus on the organic experience for the near term.<\/p>

But just like we are doing with AI Overviews and with AI Mode over time, we’ll be able to bring very, very good commercial experiences there as well, and we think people will adapt to them as they’ve always done.<\/p>

Maybe Philipp can add more. Philipp?<\/p>

Philipp Schindler, SVP and CBO, Google:<\/b> Yeah, so, your question on YouTube subscriptions versus ads, look, I mean, we love our ads business. We love our subscription business. YouTube subscriptions are increasingly important for YouTube. We’ll definitely continue a long-term focus here.<\/p>

We had strong growth across YouTube subscription products, which includes, just to be clear; YouTube TV, YouTube Music, and Premium. I think one common theme for our subscription services in general is offering viewers more choice here.<\/p>

We also have a very deep understanding of the monetization side here: “Where are we monetizing more with ads? Where can we potentially monetize more with subscriptions?” So I think we will continue this as a double-tier strategy actively going forward.<\/p>

Eric Sheridan (Goldman Sachs):<\/b> Thank you.<\/p>

Operator:<\/b> Our next question comes from Doug Anmuth with JP Morgan. Your line is now open.<\/p>

Doug Anmuth (JPMorgan):<\/b> Thanks so much for taking the questions. One for Sundar and one for Philipp.<\/p>

Sundar, can you just talk about how you’re thinking about your current access to compute? Even as you spend $10 billion more this year in CapEx, you also said that you’re still in a tight supply environment. I’m just trying to marry those.<\/p>

And then, Philipp, perhaps on Search growth, can you talk a little bit about paid click and pricing growth, just within the 12% Search growth and how we should think about volume versus monetization trends going forward? Thanks.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Doug, thanks.<\/p>

On the CapEx stuff, obviously, we are seeing strong momentum across our portfolio, especially in Cloud. You are right, it’s a tight supply environment and we are investing more to expand. But there is obviously a time delay between this additional investment will play out in future years. So, that’s why both of them are true at the same time.<\/p>

But we are planning ahead and we are investing. But overall, it’s exciting to see the traction, particularly in Cloud. I think the comprehensiveness of our AI portfolio; the breadth of our offerings, both providing our models on GPUs and TPUs for our customers, all of that has been really driving demand, and so, we are investing to match up to it.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/b> And on your paid click question, look, to be very clear, I think we said this before, we manage the business to drive great outcomes for our users and an attractive ROI for our advertisers. We actually don’t manage to paid clicks and CPC targets.<\/p>

Some of the product and policy changes we make actually drive better monetization at the expense of paid clicks. You will actually see in the 10-Q that paid clicks were up 4% year-on-year. But a number of factors affect these metrics from quarter to quarter, such as, a few examples; advertiser spending, product changes, policy changes, user engagement, and so on.<\/p>

So, it’s really important when it comes to paid clicks and CPCs to avoid drawing overly broad conclusions solely based on these metrics.<\/p>

Doug Anmuth (JPMorgan):<\/b> Thank you both.<\/p>

Operator: <\/b>Our next question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>

Brian Nowak (Morgan Stanley):<\/b> Thanks for taking my questions. I have two.<\/p>

The first one, Sundar, there’s a lot of discussion about agentic search for commercial activities and agents that can be broadly deployed. Maybe, can you just, from a technology perspective, when you sit down with the engineering teams working on some of these new agentic capabilities that could come, what are some of the predominant technological hurdles that you think need to be cleared in order to launch scalable agents for commercial queries, is the first one.<\/p>

And the second one, I think in the past, you’ve updated us on stats on sources of internal efficiency you’ve seen from gen AI-enabled capabilities. Any updates there? And any sort of learnings on friction points that also need to be overcome for some of these internal tools with gen AI? Thanks.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Thanks, Brian. Let me start with the first one on agentic capabilities.<\/p>

Look, overall, we are definitely, in many ways, when we built our series of 2.5 models, particularly with Pro, et cetera, it’s the direction where we are investing the most. There’s definitely exciting progress, including in the models we haven’t fully released yet.<\/p>

The main gaps we are all trying to do is; you’re obviously chaining a sequence of events, and so, being able to do it reliably; the latency compounds, the cost compounds. And being able to do it reliably in a way for the users. All of this comes together. In each of this, we are making progress and it all needs to kind of hang together.<\/p>

The good news is we are making robust progress. We think we are at the frontier there.<\/p>

In all of these areas, when you look back in a 12-month basis, you end up making the models much more efficient for any given capabilities. So, the forward-looking trajectory, I think, will really unlock these agentic experiences. We see the potential of being able to do them, but they are a bit slow and costly and take time, and sometimes are brittle, right? But they’re making progress on all of that.<\/p>

And I think that’s what we’ll really unlock, and I expect 2026 to be the year in which people kind of use agentic experiences more broadly. And so, it’s an exciting opportunity ahead.<\/p>

On the second part, I think when you say a source of internalization, I presume you are talking about how we are using all of this internally.<\/p>

Again, given you asked the question about agents, we are now beginning to roll out agentic coding journeys for our software engineers within the company. It’s been exciting to see, just over the last few months, particularly over the last few weeks, people are definitely doing more agentic workflows and software engineering as well, internally.<\/p>

That’s a good example of how the same experiences a few months ago had a lot of friction points; but we are overcoming it and people are beginning to use it internally on the coding side, as well as in certain other areas of the company as well.<\/p>

So, exciting progress. I expect it to be an active area where we will roll out journeys for our users as well, so I look forward to it.<\/p>

Brian Nowak (Morgan Stanley):<\/b> Thanks, Sundar. That’s great.<\/p>

Operator:<\/b> Our next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.<\/p>

Michael Nathanson (MoffettNathanson):<\/b> Thanks. Sundar, I have two for you.<\/p>

At I\/O, you announced a partnership with Warby Parker to develop glasses. So, I wonder if you’d share your view of how important a cycle of new devices will be to further scale AI? And do you envision a world in which they’re more personal and more central to our consumer experience? That’s one.<\/p>

Secondly, how does Google Search with AI Mode usage differ versus Gemini standalone app? I’m wondering, do you see any differences in usage or the types of consumers who go to the app versus those who go to traditional search with AI? Thanks.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Thanks, Michael.<\/p>

On the first thing, I think any time I\/O changes, you can drive new experiences, including on hardware experiences, too. So, I think AI will particularly enable, you’ve long heard the promise of glasses and other form factors, I think AI will spur a whole new wave of innovation there.<\/p>

We are super excited about our investment in glasses, and I’ve found the experiences have taken a dramatic step up compared to the last iteration.<\/p>

So, I think it’ll be an exciting new emerging category, but I still expect phones to be at the center of the experience for the next two to three years, at least. And so, I still think that it’s going to be phones [that] will continue to be at the center of the consumer experience. But we are excited about the emerging categories as well.<\/p>

On your second question, on AI Mode versus Gemini standalone app, broadly, there are some use cases where you can get a great experience in both places, but there are use cases which are very specific. I think where the queries are information-oriented, but people really want to rely on the information, but have the full power of AI, I think AI Mode really shines in that. You can go there, and you know it’s backed up, the Gemini models are using Search deeply as a tool, so it’s all grounded in that Search experience, and I think users are responding very positively to it.<\/p>

Whereas, in the Gemini standalone app, you see everything from; people can have a long conversation on chat, just trying to pass time in the Gemini app. You’ve seen early cases where people may get into a therapy-like experience.<\/p>

So, these are all emerging experiences of what people do, and I think this is why I’m glad we have both surfaces and we can innovate in both of these areas.<\/p>

Of course, there will be areas which will be commonly served by both applications, and over time, I think we can make the experience more seamless for our users.<\/p>

Michael Nathanson (MoffettNathanson):<\/b> Thanks, Sundar.<\/p>

Operator:<\/b> Our next question comes from Mark Shmulik with Bernstein. Your line is now open.<\/p>

Mark Shmulik (Bernstein):<\/b> Thanks for taking the question. Sundar, it seems there’s almost like a daily news report about the AI talent war and high-profile folks moving around. Would just kind of like your perspective on how you think Google has been doing both at attracting and retaining key AI talent?<\/p>

Anat, along the similar lines, how do we think about AI-related resourcing costs alongside a step up in capital investments required to go build for AI? Thank you.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Mark, on the first question, look, I think we’ve gone through these moments before. We have obviously always deeply invested in talent, including in AI talent, for well over a decade now. I think we have an extraordinary both breadth and depth of the talent.<\/p>

In my experience, the top people look for a combination of; they want to really be at the frontier driving progress, and so the mission and how state-of-the-art your work is matters, so that’s super important to them, access to compute resources, and access to your peers, working with the best people in the industry.<\/p>

It’s a combination of all of that and using it to drive impact, and I think we are pretty competitive on all those fronts. Through this moment, I look at both our retention metrics as well as the new talent coming in, and both are healthy. I do know individual cases can make headlines. But when we look at numbers deeply, I think we are doing very well through this moment.<\/p>

We’ll continue investing in the people and the talent and the compute needed to make sure we are set up well for the opportunity ahead.<\/p>

And maybe I’ll pass it on to Anat.<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/b> Yeah, on the question on how we integrate this into our overall cost structure. And I’ve mentioned it before, the benefit of having the full stack includes research, which is our people, and one of our most critical resources. So, we make sure that we invest appropriately to have the best and brightest minds in the industry sitting here at Google and advancing our innovation to customers.<\/p>

It is part of what you’re seeing now in our operating expense line across the organization, but we’re also working hard to offset, not just growth and investment across the business, but also to ensure that we can allocate resources appropriately.<\/p>

So, Sundar mentioned earlier the use of AI tools within the company. So that’s another area where we can drive efficiency across the businesses, is to use these tools internally in terms of how we run the organization.<\/p>

And then we’re continuing on the same efforts that I’ve talked about before with regards to running the company with a high level of discipline, execution, and driving efficiency across the business.<\/p>

Operator:<\/b> Our next question comes from Ross Sandler with Barclays. Your line is now open.<\/p>

Ross Sandler (Barclays):<\/b> Great. If I can ask two, that would be great.<\/p>

So, the first one is on Search click-through rates as a driver of monetization. So, you guys have done a great job over the past decade of driving better ad relevancy and higher click-through rates in Search. Just curious, as we look forward and we see lower ad impressions per SERP and all these things that are changing with AI Overviews and different AI search formats, how do you feel about your ability to drive CTR going forward?<\/p>

Then the second question is: it looks like you’re now working with OpenAI for some aspect of cloud infrastructure. Just curious how that relationship might expand in the future? Thank you.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/b> I can take the first one.<\/p>

Look, specifically referring to the AI Overviews, if I understood your question correctly, Sundar mentioned it. They continue to drive higher satisfaction. They continue to drive higher Search usage. They’re scaling up very nicely, and they’re actually working for our entire user base now, scaled to over two billion users in over 200 countries. So, very happy with this development.<\/p>

When it comes specifically to the monetization of it, we talked about it before. We see monetization at approximately the same rate, which gives us actually a really strong base on which we can then innovate and drive actually more innovative and new and next generation ad formats. That’s how we look at it at this moment in time.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> On the second part, with respect to OpenAI, look, we are very excited to be partnering with them on Google Cloud. Google Cloud is an open platform, and we have a strong history of supporting great companies; start-ups, AI labs, et cetera. So, super excited about our partnership there on the cloud side. We look forward to investing more in that relationship and growing there.<\/p>

Operator:<\/b> Our next question comes from Mark Mahaney with Evercore. Your line is now open.<\/p>

Mark Mahaney (Evercore):<\/b> Ok, two questions, please. First, could you just describe, maybe Philipp, what you see in terms of the ad environment, maybe for the back half of the year, maybe versus last year? Does it seem as certain or as uncertain as it was last year? The results seem pretty strong. Are there any unusual concerns you have for the back half of the year?<\/p>

And then, Sundar, I want to ask you again about the two-surfaces approach to search. You must have some internal metrics that tell you that that’s the optimal way for you to approach the market. But I’m sure there’s a counterargument that just having that unified search and being able to discern the intent of the search, whether it’s pure information or commercial, just from the query, that that could give you a material advantage over other offerings in the market.<\/p>

Just talk a little bit about what metrics you’ve seen that make the two-surface solution seem to be optimal. Thank you.<\/p>

Philipp Schindler, SVP and CBO, Google:<\/b> So, let me start.<\/p>

Look, we said our Ads business performed strongly in Q2. Give you maybe some vertical color of it. In Q2, Search and Other performance was led by growth across all verticals. We mentioned the largest contributions from Retail and Financial Services, which was probably due actually to strength in Insurance. We saw Healthcare as a sizable contributor to growth as well.<\/p>

Look, we’re only a few weeks into Q3, so I think it’s really too early to comment on anything happening in the second half of the year.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Mark, on the second part of the question, look, I think between these two surfaces you’re pretty much covering the entire breadth and depth of what humanity can possibly do. So I think there’s plenty for two surfaces to tackle at this moment.<\/p>

Obviously, you are right. Search is more information-focused, and we think of the Gemini app as more your assistant; more personal, proactive, and powerful assistant for every aspect of your daily life. And so, you can imagine wanting to code deeply or create a long video, et cetera. Those things can be done by the Gemini app today, better.<\/p>

Over time, like we’ve always done, we’ve gone through these evolutions before, like as you point out. We can understand user intent better and abstract some of the complexity for our users. At one point, people used to query separately for text, differently from images, differently from videos, et cetera, and we kind of made it all seamless with universal search.<\/p>

So, we have the experience of being able to bring together experiences in a way that makes sense for our users and do the heavy lifting for them.<\/p>

But I think when you’re in this early stage of new, emerging paradigms, I think we want to make sure we can meet them with what they are expecting today, and over time, I think it will give us an opportunity to serve them better. So, I think that’s how we are thinking about it.<\/p>

Mark Mahaney (Evercore):<\/b> Okay, thank you.<\/p>

Operator:<\/b> Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>

Ken Gawrelski (Wells Fargo):<\/b> Thank you very much. Two, if I may, please.<\/p>

The first, on Cloud. I’m just hoping maybe you could clarify your back-half outlook. Given last quarter you talked about some supply constraints that would ease towards the end of 2025, but yet you put up a really nice acceleration in Q2. Now, you’re talking about some supply constraints easing into ’26. If you could just clarify a little bit on the back-half outlook for Cloud, given the strong results in Q2.<\/p>

And the second is a bigger picture question, which is: agentic experience, does it democratize the web like Search did two decades ago, enabling discovery in the long tail? Or does it lead to more concentration with a smaller group of vertical winners? Would love it if you could opine on that. Thank you.<\/p>

Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/b> Okay. On your first question on the Cloud second-half outlook, and the comments I previously made with regards to where we’re going to see the capacity increase. So, obviously, we’re working hard to bring more capacity online, which means data centers and servers that are coming online, and we see more of an increase towards the back end of the year.<\/p>

But we’re increasing capacity with every quarter that goes by as you can see, with the growth rates we’ve had, both this quarter and in the previous quarter.<\/p>

As Sundar mentioned earlier, this is not the type of investment that’s a light switch. It takes time to make this investment. So what you’re seeing now is investments we made some time ago that’s now translating to additional capacity coming online, but more of that towards the back end of the year.<\/p>

I will say it’s important as you think about Cloud growth not to think about this in a linear fashion, because the quarter-on-quarter growth rates could depend on the timing of capacity delivery and when that comes online, so that could move a little bit from quarter to quarter.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Look on agentic experience, look, I think there was an earlier question on the technology aspects of it and how we are making progress. Obviously, there is the value proposition for all the players involved, and I think that’s going to be an equally important thing to create the unlock here.<\/p>

And I do think over time users will, it’s clear to me as you make progress on the agentic experience, it’s going to be a much better experience for users.<\/p>

And so, you will find savvier players leaning into these experiences, and that will help them grow and meet this moment. And so, I do think it’s an opportunity for some of the players.<\/p>

And so, you are right, just like in the early days of the Web, there are aspects about it which will expand access, grow the use cases, et cetera. And I think that elements are there.<\/p>

But I do think it’s important, it’s not just a technology play, but we have to solve the business models for the varying players involved. And so, I think that’s going to be an important part of this evolution as well.<\/p>

Ken Gawrelski (Wells Fargo):<\/b> Thank you.<\/p>

Operator:<\/b> And our last question comes from Justin Post with BAML. Your line is now open.<\/p>

Justin Post (BAML):<\/b> Thank you. A couple for Sundar.<\/p>

First, it looks like the subscription businesses are all tracking well, and certainly Gemini 2.5 has got some good reviews. How are you doing with Gemini subscriptions? I know it’s a focus area for the company. Anything you can do to accelerate the consumer subscriptions of Gemini within Google One?<\/p>

And then secondly, just on the course change of CapEx, obviously a bigger increase, which appears to be because of Cloud demand. But just your comments on Cloud ROI, I’m sorry, CapEx ROI, what gives you confidence that you’re going to get good returns on that spend? Thank you.<\/p>

Sundar Pichai, CEO, Alphabet and Google:<\/b> Great. Look, on the first thing, on subscriptions, we have definitely, Google One has been an attractive value proposition powered by storage, but now our AI plans, including both Pro and Ultra, and particularly with the 2.5 series of models, we have definitely seen accelerated traction. So, it was a very healthy quarter. And so, we are definitely excited about the opportunities ahead.<\/p>

And you will find through this moment, I think we’ll be able to drive growth in that area, based on our AI offerings. And so, it’s definitely an area we are both excited by and we are actually seeing traction, particularly in the last quarter, ever since we introduced 2.5 Pro. So, we are excited about the trajectory there.<\/p>

On the CapEx, on the Cloud side, look, I think we are definitely investing because we are delivering a lot of value through our cloud offerings. And I think it’s important to understand, as we build more and more of an install base with Google Cloud; we have very high customer satisfaction, our churn rates are very low, and we are much more efficient in the investments needed to grow those lines of businesses.<\/p>

So, you’re seeing all of that play out in our margin trajectory, particularly if you look at it annually, sequentially, over the past few years.<\/p>

And so, all of that gives us confidence as we are investing in this, we’ll be able to have a healthy ROI on our investments. And particularly in this AI moment, there’s definitely, the value we are delivering to the customers is also growing pretty significantly on a forward-looking basis.<\/p>

And so, I think all of that will help us do well here.<\/p>

Operator:<\/b> Thank you. 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.<\/p>

Jim Friedland, Head of Investor Relations: <\/b>Thanks, everyone, for joining us today. We look forward to speaking to you again on our third quarter 2025 call. Thank you, and have a good evening.<\/p>

Operator:<\/b> Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.
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Transcript<\/span><\/strong><\/p>

This preliminary transcript is provided for the convenience of investors only, for a full recording please see the Goldman Sachs Communacopia + Technology conference <\/em>webcast<\/u><\/em><\/a>.<\/em><\/p>\r\n

Thomas Kurian, CEO of Google Cloud at the Goldman Sachs Communacopia + Technology Conference on September 9, 2025<\/strong><\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> Okay. Thanks, everyone, for getting settled. Our next presentation and conversation is going to be with Alphabet with Thomas Kurian, CEO of Google Cloud. I’m going to start with the Safe Harbor, give you a little bit of Thomas’ background, bring Thomas up, and he’s going to go through some slides and then we’ll have a conversation.<\/p>\r\n

Some of the statements Mr. Kurian may make today could be considered forward looking. These statements involve a number of risks and uncertainties that can cause actual results to differ materially. Please refer to Alphabet’s Forms 10-K and 10-Q including the risk factors discussed in its Form 10-K filing. Any forward-looking statements Mr. Kurian makes are based on assumptions as of today and Alphabet undertakes no obligation to update them.<\/p>\r\n

Thomas Kurian joined Google Cloud as CEO in November of 2018 bringing deep enterprise experience to the company. He has grown the business into one of the world’s largest public clouds with more than $50 billion annual revenue run rate. Thomas is here for the third year in a row. Thomas, welcome to the conference and thanks for coming again.<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> Thank you, Eric. Thank you, all, for having me. Cloud computing continues to grow as the primary vehicle through which enterprises deploy their core information technology systems. Cloud, although it has grown, it’s still in its early phase, because a lot of machines and applications still run on premise and have not yet moved. So despite our growth, we see a lot of opportunity ahead.<\/p>\r\n

Over the last two years, organizations are changing in many industries who they choose as their cloud partner. In the past they were focused on application hosting or web hosting. Increasingly they’re looking at who can bring the technology and solutions to help them transform their business with artificial intelligence applied in different domains in their organization.<\/p>\r\n

At Google Cloud, we have deep product differentiation because of years of work in AI. As a result of that product differentiation, we’re capturing new customers faster, we’re deepening our relationships with existing customers and we’re growing our total addressable market.<\/p>\r\n

So why are we winning? We provide deep product differentiation in performance, cost, reliability, and efficiency in AI infrastructure.<\/p>\r\n

Second, we provide deep differentiation by offering a leading suite of best-in-class generative AI models.<\/p>\r\n

In order to feed these models, we use our strength and historical strength in data processing, analytics, and security to feed models with high-quality data and keep them safe.<\/p>\r\n

And finally, for many years now, we’ve been building domain-specific AI applications and agents and that work is now seeing a lot of interest from customers.<\/p>\r\n

So starting with AI infrastructure. You know, we’ve introduced chips for many years. We’re in our 11th year now building AI systems and chips. Our AI systems are optimized for high performance, highly reliable and scalable training. As well as for inference.<\/p>\r\n

For example, if you’re running a large-scale cluster, we have two times the power efficiency. Meaning you get two times the FLOPS per watt. And with power now the scarce resource, you get a lot more capacity. We’re typically seeing about a 50% performance delta between us and other players, and if you look at the total capacity you can get on a single system, you can get 118 times more throughput through our systems than you can from the next player.<\/p>\r\n

In addition to that, we’ve integrated high-performance storage for AI-specific storage. That can be used to scale out a cluster much more efficiently, And if you’re doing inference, offer incredibly low latency. And our years of work in storage optimization has now seen lots of interest. We’ve seen a 37 times increase in the volume of data being used in our AI-optimized storage.<\/p>\r\n

We connect all of this with very high bandwidth optical networking. The value of optical networking is you can dynamically change the configuration of a cluster so that you can slice it up differently if you wanted for training and inference without taking an outage, which is hugely important for labs as they see demand shifting from training workloads to inference.<\/p>\r\n

And finally, Google has been at the forefront of most of the software that people are using for training. For example, compilers like JAX, XLA, Pathways, and all this software expertise allows us to optimize the stack.<\/p>\r\n

We see demand from four customer segments. First, is the AI Labs. Nine of the ten leading AI labs in the world, if you take the ten largest, nine of them are our customers. We see demand from traditional enterprises who are deploying AI models. We’re seeing demand in capital markets. As capital markets shift from using classical computation for algorithms and are shifting to use inference, the same systems we offer can be used to provide very high frequency calculations.<\/p>\r\n

And we’re seeing interest in high-performance computing applications. SSI, a leading lab, is a customer. LG Electronics and LG AI found both performance and cost benefits in using our infrastructure.<\/p>\r\n

On this infrastructure, we offer a suite of models. Not just Alphabet’s, but 182 leading models from the industry. Our own models fall in four categories, we offer leading models for large-scale generative AI applications, Gemini. Gemini leads in many dimensions: performance, cost, quality, factuality, the ability to do very sophisticated kinds of reasoning. It’s used by 9 million developers to build applications.<\/p>\r\n

And just to give you a sense, compared to 1.5 which we launched in January of this year, 2.5, our latest model, reached a trillion tokens 20 times as fast. So we’re seeing large-scale adoption of Gemini by the developer community. In addition to that, we offer a leading suite of what’s called diffusion models. Diffusion models create images, video, audio, speech, et cetera.<\/p>\r\n

We’ve added a third set of models around scientific computation. For example, our time series model is used by many firms in financial services to do numerical prediction of sequences. Molecular design, we offer a model to help people design molecules which is getting a lot of interest in the pharmaceutical industry. So there’s a whole range of models.<\/p>\r\n

And as people switch from just using a raw model to building an agent, we’ve introduced based on our history in leading many open-source projects, something called Agent Development Kit which is a platform to help people build agents. It is by far the leading agent development platform in the industry supported by over 120 companies.<\/p>\r\n

To give you a sense of the scale, if you compare us to other hyperscalers, we are the only hyperscaler that offers our own systems and our own models. And we’re not just reselling other people’s stuff. The volume of tokens we process, twice the other providers in half the time. So roughly four times the volume.<\/p>\r\n

We have a lot of different companies using these AI models from companies creating digital products to using AI within their organization. Canva is an example of a company using our diffusion models to create image and video content. ServiceNow is one of many SaaS companies that use our model Gemini. And the reason they’re using it is not only does it give them great performance and quality and latency, but it can also be deployed in four different configurations: in a cloud, in a classified environment, out on the edge, and also now on top of any Nvidia cluster. In the past if you wanted to run a model in your data center, you had to use an open-source model because you had to give up the weights of it. And we’re the only ones that offer that as well.<\/p>\r\n

When you use models, you need to feed them with high-quality data. And as you put more and more of your company’s information into the model, you need to keep the model secure.<\/p>\r\n

So our history and expertise in large-scale data platforms has helped us as well as our focus in building security products. So we allow people to migrate data, clean it, prepare it, and feed it into the models using our data cloud.<\/p>\r\n

Second, we provide incredible low-latency connectivity between our analytic and database platforms and models running on our Cloud. Allowing people to use models to process information from our data platforms.<\/p>\r\n

Third, as people want to understand data and use models to reason on this data, we’ve introduced new data science and conversational analytical agents. Think of it as vibe coding with your data, it’s much easier for anybody to ask questions in natural language and do data analysis and also create data science models.<\/p>\r\n

All that is driving growth in our data platforms. To give you a sense, we’ve seen a 27 times increase in the volume of data processed in our data cloud, BigQuery, with Gemini. And we’ve seen that BigQuery which normally when people think of data warehouses, they think of things that handle numbers and tables. Now it’s also being used to store and process unstructured data. We have many more customers than some of the pure play providers. And our strength in security is now applied to AI models.<\/p>\r\n

We protect your data. We have new solutions to protect models themselves so when you load your data into models, you don’t get a compromise of the model. And third, we also protect organizations with new advances that we’ve introduced from threats introduced using AI models to attack systems. All that has driven growth with a lot of different customers from regulated industries to commercial enterprises to small businesses.<\/p>\r\n

Two quick examples: Radisson Hotels, they took all their data for customer segmentation and all data from the hotels, consolidated in a data cloud, and used Gemini and our diffusion models to create advertising. Virgin Media is using the same combination but using it to improve the speed of decision making and data engineering within their organization.<\/p>\r\n

Lastly, we started our work to build domain-specific enterprise agents in 2021. So we’ve worked on it for four years now. We focused in five areas. Agents to help software engineers write code, our Gemini Command Line Interface AI Agent which we introduced on June 24th has grown to close to a million users already.<\/p>\r\n

We allow people to build domain-specific agents. For example, for marketers to create content. Customer service teams to handle customer service interactions. We’ve seen strong growth, for example, in our customer service technology with a 10 times growth in chat and voice interactions.<\/p>\r\n

We’re also building domain-specific agents for specific industries. For example, to help people do shopping and commerce. Today we roughly handle 5 billion commerce transactions through our Commerce Agent. And we make all of these agents as well as any bespoke one that people want to build available to a single platform we call Agentspace, which provides a single panel for a company to access and use all of the AI technology within the organizations.<\/p>\r\n

We’re seeing growth and broadening of our addressable market by applying AI now in domains that IT departments historically didn’t serve. Marketing, customer service, commerce, et cetera. Mercado Libre is one of the largest e-commerce systems in Latin America. They use our shopping and commerce technology. Wells Fargo uses Google Agentspace to help their employees use AI from trade management, contract management, and other domains.<\/p>\r\n

So our deep product differentiation has driven the growth that we’re seeing in customers. Now, how are we taking all of this to market? We’re doing it -- there are five important things. First of all, we monetize AI in five different ways. We’re seeing growth from net new customers, we’re seeing deeper relationship with existing customers, we’re broadening our addressable market.<\/p>\r\n

As a result of that we’re seeing a growth in revenue, our remaining performance obligations of backlog and operating margin. The five ways we monetize AI. Some people pay us for some of our products by consumption. So if you use our AI infrastructure whether it’s a GPU, TPU, or use a model you pay by token, meaning you pay by what you use.<\/p>\r\n

Some of our products people pay for by subscription. You pay a per-user, per-month fee. For example, Agentspace or Workspace. Some monetization comes by increased product usage. So if you use our cybersecurity agent and run a threat analysis using AI, we’re seeing huge growth in that. Example we’re over 1.5 billion threat hunts, we call it, using Gemini, and that drives more usage of our security platform. Similarly we see growth in our data cloud.<\/p>\r\n

We also monetize some of our products through value-based pricing. For example, some people use our customer service system; say I want to pay for it by deflection rates that you deliver. Some people use our creative tools to create content; say I want to pay based on what conversion I’m seeing in my advertising system.<\/p>\r\n

And then finally, we also upsell people as they use more of it from one version to another, because we have higher-quality models, more quota, and other things in higher priced tiers. Because of this, we’re capturing new customers faster. As I said, we’ve seen 28% sequential quarter-over-quarter growth in new customer wins in the first half of this year. Nine of the ten top ten AI labs and nearly all the AI unicorns are our customers.<\/p>\r\n

We’re deepening our relationship with existing customers; 65% of our customers are already using our AI tools in a meaningful way. Those customers that use our AI tools typically end up using more of our products. For example, they use our data platform or our security tools. And on average, those that use our AI products use 1.5 times as many products than those that are not yet using our AI tools. And that leads then customers who sign a commitment or a contract to over-attain it, meaning they spend more than they contracted for, which drives more revenue growth.<\/p>\r\n

Finally, we’re growing and diversifying our revenue. Our revenue does not come from a single product line. We have many different product lines, all of them growing. And as Sundar and Anat, our CFO, have both mentioned, we’ve made billions using AI already.<\/p>\r\n

We’re growing revenue while bringing operating discipline and efficiency. So our remaining performance obligation, or backlog is sometimes referred to, is now at $106 billion. It is growing faster than our revenue. More than 50% of it will convert to revenue over the next two years. So not only are we growing revenue, but we’re also growing our remaining performance obligation.<\/p>\r\n

We’re also very focused on operating discipline to improve operating margins. The three big areas of focus: One is making sure we’re super efficient from the point of view of using our fleet and our machines so that we get capital efficiency. There’s many hundreds of projects that people have done to optimize. And the larger the fleet generally the more efficient you get because you need less buffer for any individual customer. You’ve also seen a study that some of our scientists published on the improvements in inferencing we’ve done with a 33 times efficiency in inference using some of the models over the last year.<\/p>\r\n

So there’s a lot of focus on continuing to optimize our fleet. We’re improving our go-to-market organization, now has a large customer base to sell to. And selling to existing customers is always easier than selling to new customers, so it helps us improve the cost of sales as a percentage of revenue.<\/p>\r\n

And finally, we’re also building on a large suite of products already. So it helps us improve our engineering productivity. You see that in our results. We’re growing top line and operating income.<\/p>\r\n

In closing, we’ve spent years building advanced AI technology of our own: chips, systems, tools, agents. We made those bets very early, much of the work that you see today has been underway for many, many years. And we’re not just reselling third-party technology. So why we’re winning is because we see this deep product differentiation now being adopted by customers.<\/p>\r\n

That’s leading us to win new customers, deepen our relationship with existing customers, and broaden our addressable market. And in turn, that’s leading us to grow revenue and operating income. Thank you.<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> Thank you, Thomas. Thanks so much for a lot of good stuff in there. So I want to come back to where you started the presentation talking about the state of the industry today. So as we exit ’25, we’re looking towards 2026, where are we in terms of Cloud adoption, client usage trends, and how is Google Cloud evolving in terms of that competitive landscape and those secular growth themes?<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> Cloud adoption is still in its early stages. If you count servers, depending which analysts you read, still a vast majority run on premise and people’s data centers. So there’s a lot of remaining opportunity ahead for people to migrate these workloads, to modernize them, to transform them.<\/p>\r\n

There are different adoption patterns we see in different industries. Some are moving more quickly. Some, for example government agencies, some of them move a bit slower because of compliance and other regulations. Europe has been generally slower to move because of sovereign cloud requirements, we’ve now introduced them. So we are starting to see many different drivers for people to pick that up.<\/p>\r\n

But in the past, people chose cloud primarily as a mechanism to get developer efficiency. Meaning you can get infrastructure on demand and to host applications, and to save money in hosting applications by consolidating compute and storage. And that’s, you know, that continues to be important, but that’s not the primary driver. The big driver now is I really want to transform the organization. Can you help me by bringing AI expertise and products to help me?<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> So with that as a jumping off point, when you sit and look at the enterprise landscape today and the way enterprises are adopting AI, put a finer point on your presentation in terms of how those trends inform your strategic priorities as a company.<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> So we see organizations using AI in four domains. Some companies are using it to build digital products. Natura Cosmetics, Snap, the work we did with Warner Brothers to create the Wizard of Oz. Those are all essentially using AI to advance a digital product.<\/p>\r\n

Others are using it to transform customer service. And when I say transform customer service, it’s not just in the call center as we do with Verizon, but at the point of sale as we do with Wendy’s, in a vehicle as we’re showing with Mercedes today in Munich. So there’s many different places where people see that customer interface transformation.<\/p>\r\n

Others are using it to streamline the core of the company in the back office. When I say the back office, Home Depot is using it to answer HR help desk. When employees ask questions regarding benefits and other things, they’re using our agent to answer those questions. AES which is a large energy company streamlined their regulatory and audit process, reducing the cycle time. Tyson Foods is using it in supply chain.<\/p>\r\n

And then finally, we’ve seen a lot of organizations now using it in their IT departments. And in their IT departments, broad brush, there’s people using it to write code and not just to write code but to improve the quality of code being written, there are people who are using it for cyber, because cyber generally there’s a bottleneck in terms of how many cyber analysts you have. And these AI tools can be used to both help you identify and prioritize what threats are occurring and then much more quickly analyze if you’ve been compromised. So those are the four big domains that we see AI being adopted for.<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> Okay. When you think about your full stack approach to AI, talk to us a little bit about how that might be creating competitive advantages in the marketplace and how does it help you translate into winning deals?<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> It’s a great question. Our stack is open. Meaning we offer our own accelerators. We have a super close working relationship with Nvidia, because people want a choice of different types of configurations of systems. Same thing with our models, we offer our own as well as third party.<\/p>\r\n

What it helps us do, though, is we can optimize things differently up and down. So I’ll give you an example. If you look at the work we do with capital markets, applying AI to synthesize data from information sources and then use it to actually feed algorithmic models. You need a certain set of skills to reason on it, you need a certain set of capability to choose the right tool, and you need to be able to do it with ultra-low latency. So that combination of things that we bring from the enterprise, surprisingly at the model level it’s the same thing you need to have a great coding tool.<\/p>\r\n

It turns out if you want to do software engineering, you have to choose the right tool for the right task, you want to be able to generate code with low latency so when you do autocompletion, it happens.<\/p>\r\n

And it’s also the same thing that applies in certain circumstances on the Search side. So the fact that we’re able to get all of these different design centers and we’re using one model series for all of Alphabet as well as our customers helps improve the model. And then because we’re optimizing that model up and down, as we had Jeff Dean and our team talk about how much more efficient we’ve become on serving, it also helps us optimize the cost of inference in serving. So we can codesign things. We get leverage because of all of the domains we’re serving both across enterprise and the consumer side. And we can also optimize the cost structure when we deliver these things.<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> Okay. Building on that theme, in your presentation you touched upon the idea of your AI infrastructure and building advantage and scale around that. Talk a little bit about where custom silicon and TPUs makes sense as opposed to working with external suppliers. And talk about some of the key learnings of customers who have used TPUs and the use cases where they deploy them.<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> So you know we, broad brush, I think when people look at models, they think there’s one type of model. There are many different types of models. There’s dense models, mixture of experts, sparse models, do you need a sparse core or not. So we offer a range of accelerators.<\/p>\r\n

Where people really choose the right thing for their model is based on a variety of factors. It often comes down to the experts sitting down and actually trying it. And we see four key things: First one is: Are you doing a kind of hero model run? And if you’re running a hero model run, it’s typically on a giant cluster that you want to scale out. And they care a lot on the FLOPS per dollar, meaning how many are you getting per dollar?
How efficient are you able to load your dataset into memory, so how much HBM do you have? Are all the nodes in the cluster communicating with super predictable latency, which is where the optical network comes in. And then can you then use certain things like the compiler to really optimize what at the bottom level is equivalent of an instruction set.<\/p>\r\n

And so the TPU is seen as really attractive by many of the leading labs because it gets their training runs to get much more throughput through the system. It’s also being used by people with inference and we have very close working relationship with Nvidia to allow us to allow customers to train on TPU, serve on GPU or vice versa. There’s a lot of things we’ve optimized with Nvidia. For example, JAX is optimized not just on TPU but GPU. So it’s not just the infrastructure but the entire software layer on top.<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> Got it. Understood. You laid out a lot of initiatives on the product side, the platform side all leading to the types of growth you’re seeing today. What are the biggest priorities for investments in the business in support of that growth?<\/p>\r\n

And how do you think of getting that mix right between striking the right balance on investments and driving growth?<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> We look at investments in three big categories. Obviously our supply chain and capital investments which span data centers, power, long-term power contracts, what we’re doing with our different geographical locations, because inference now needs to be in many different countries for sovereignty reasons. So one is our capital infrastructure and we’ve had a team for years and years do that at enormous scale. And we continue to do that. And we’re very thoughtful on how we’re doing it.<\/p>\r\n

In each area, we also look at how do we get more efficient. For example, we’re constantly optimizing, one example is as you get these more powerful chips, they also take a lot more power, and power is in many cases a short resource. We have the most efficient PUE in the world. PUE is how much power are you consuming to create X amount of FLOPS. And we invested very early in water cooling, and water cooling gives you another lift in throughput through these systems. That’s an example of where we said, hey, there’s likely to be a power issue. Let’s design early a set of solutions. And that’s helped us with an advantage there.<\/p>\r\n

We invest in products. So we’re very thoughtful and disciplined in which domains are we solving and what do we want to make in products.<\/p>\r\n

And then we invest in the go-to-market organization. And the go-to-market organization, you know, when I started at Google, nobody thought we’d be where we are. The first several years almost all our sales were to brand new customers, and it’s difficult to win them, but we’ve actually won many of them. Now we have teams that know how to sell specialization for specific products. We know how to sell to existing customers. We have a different model to sell to new customers. So all that sophistication has been built over many years.<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> You also talked in your slides about how the margins continue to build in the reported segment behind Google Cloud. Talk to us a little bit about not only getting that right on the growth side but you talked a little bit about it driving efficiencies and continue to make progress on the margin side of the business over the long-term as well.<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> There’s a lot of people working really hard to continue to improve top line and operating margin. Some of it is, you know, down to really fundamental things. If you look at us, we made some decisions early to say we’re going to build our own chips, our own models, and also products around the models.<\/p>\r\n

So that gives us, when you’re not just distributing somebody else’s stuff, you obviously can optimize cost and improve margins. Even when we look at examples of products we’ve built around the model. In 2021, we saw a lot of companies talking to us about the call centers were shut down because of COVID and they could not handle the volumes of calls coming in, so we said let’s build an AI-powered customer service system.<\/p>\r\n

That’s now being used at a large scale, and that’s an example of something that’s a very differentiated product. It’s not just here’s a model and access it through an API, there’s a lot of capability we built into that. Those decisions that we made early and years of continued effort both in the past and in the future, we’re very focused on that. Both improving top line and operating income.<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> I’ll try to squeeze one last one in. When you think about the deployment of AI that’s happening right now in the ecosystem and you look at the infrastructure layer, the model layer, the application layer, where are you seeing the most exciting things being deployed that could be elements of driving growth in your business over the medium to long-term?<\/p>\r\n

Thomas Kurian, CEO, Google Cloud:<\/strong> I think we see a lot of interest in, it’s sort of we’re roughly in every six-month cycle. And what I mean by that is we find that a major model revision opens up an entire new category of capability, and that in turn drives us to build value-added products on top of it.<\/p>\r\n

And so it’s roughly, we’re in a six-month iteration. So for instance, if you look at Veo 3, it’s an amazing video creation system. So we have enormous interest from advertising companies, creative labs, media companies, movie studios, et cetera. That market did not exist prior to Veo reaching that level of breakthrough.<\/p>\r\n

And then we take that because we’re co-engineering it with Google DeepMind, we’re able to build an entire set of assets around it, as product, that people can use to apply to specific domains. That’s roughly the cycle we’re on, it may get faster. A lot of it depends on what kind of breakthroughs we’re working on.<\/p>\r\n

Eric Sheridan (Goldman Sachs):<\/strong> Great example. I think we’re going to have to leave it through. Thomas, thank you so much for coming to the conference this year. Please join me in thanking Thomas and the Alphabet team for being part of the conference.<\/p>","DocumentFileSize":"216 KB","DocumentFileType":"PDF","DocumentPath":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2025\/Sep\/thomas-kurian-goldman-sachs-transcript-09-09-25.pdf","EventId":997,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"00000000-0000-0000-0000-000000000000","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2025\/Thomas-Kurian-CEO-of-Google-Cloud-at-the-Goldman-Sachs-Communacopia--Technology-Conference-on-September-9-2025Thomas-Kurian-CEO-of-Google-Cloud-at-the-Goldman-Sachs-Communacopia--Technology-Conference-on-September-9-2025\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"00000000-0000-0000-0000-000000000000","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"","ReportYear":"","RevisionNumber":43049,"SeoName":"Thomas-Kurian-CEO-of-Google-Cloud-at-the-Goldman-Sachs-Communacopia--Technology-Conference-on-September-9-2025Thomas-Kurian-CEO-of-Google-Cloud-at-the-Goldman-Sachs-Communacopia--Technology-Conference-on-September-9-2025","TagsList":null,"TimeZone":"PT","Title":"Thomas Kurian, CEO of Google Cloud at the Goldman Sachs Communacopia + Technology Conference on September 9, 2025","WebCastLink":"","WorkflowId":"61ba20ee-aa3f-4aa5-8c2e-2cb778e109c3","EndDate":"09\/09\/2025 11:10:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"09\/09\/2025 10:10:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"Q3 2025 Webcast Link","Type":"Document","Url":"https:\/\/www.youtube.com\/watch?v=hA1OEi6TRYU"},{"ContentFileWorkflowId":null,"DocumentType":"file","Extension":"PDF","Size":"303 KB","Title":"For a PDF version of the transcript, please click here","Type":"Document","Url":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2025\/Oct\/29\/2025_Q3_Earnings_Transcript.pdf"}],"Body":"

This transcript is provided for the convenience of investors only, for a full recording please see the Q3 2025 Earnings Call webcast<\/a>.<\/em><\/p>\n

 Operator:<\/strong> Welcome, everyone. Thank you for standing by for the Alphabet Third Quarter 2025 Earnings Conference Call.<\/p>\n

 <\/strong>At this time, all participants are in a listen-only mode. After the speaker presentations, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/p>\n

 <\/strong>I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. <\/p>\n

 <\/strong>Please go ahead. <\/p>\n

 Jim Friedland, Head of Investor Relations:<\/strong> Thank you. Good afternoon, everyone, and welcome to Alphabet's Third Quarter 2025 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler, and Anat Ashkenazi.<\/p>\n

 <\/strong>Now, I'll quickly cover the Safe Harbor.<\/p>\n

 <\/strong>Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>\n

 <\/strong>Actual results could differ materially. Please refer to our Forms 10-K and 10-Q,  including the risk factors. We undertake no obligation to update any forward-looking statement.<\/p>\n

 <\/strong>During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>\n

 <\/strong>Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>\n

 <\/strong>And now, I'll turn the call over to Sundar. <\/p>\n

 Sundar Pichai, CEO, Alphabet and Google:<\/strong> Thank you, Jim. Good afternoon, everyone, and thanks for joining us. <\/p>\n

 <\/strong>This was a terrific quarter for Alphabet, driven by double-digit growth across every major part of our business. We are seeing AI now driving real business results across the company.<\/p>\n

 <\/strong>We delivered our first-ever $100 billion dollar quarter. Five years ago, our quarterly revenue was at $50 billion. Our revenue number has doubled since then, and we're firmly in the generative AI era.<\/p>\n

 <\/strong>In parallel, we've built for the long term and diversified, with successful businesses in Cloud, YouTube and Subscriptions.<\/p>\n

 <\/strong>Our momentum is strong, and we're shipping at speed. As just a few examples:<\/p>\n

 <\/strong>Our first party models, like Gemini, now process seven billion tokens per minute, via direct API use by our customers. <\/p>\n

 <\/strong>The Gemini App now has over 650 million monthly active users, and queries increased by 3x from Q2.<\/p>\n

 <\/strong>Cloud had another great quarter of accelerating growth with AI revenue as a key driver. Cloud backlog grew 46% quarter-over-quarter to $155 billion.<\/p>\n

 <\/strong>And we crossed 300 million paid subscriptions, led by growth in Google One and YouTube Premium.<\/p>\n

 <\/strong>Today, I'll discuss progress in our full-stack approach to AI, and then share highlights from Search, Cloud, YouTube and Waymo.<\/p>\n

 <\/strong>As a reminder, our full-stack approach spans AI infrastructure; world-class research, including models and tooling; and our products and platforms that bring AI to people everywhere.<\/p>\n

 <\/strong>First up, AI infrastructure. Our extensive and reliable infrastructure, which powers all of Google's products, is the foundation of our stack and a key differentiator. We are scaling the most advanced chips in our data centers, including GPUs from our partner NVIDIA, as well as our own purpose-built TPUs, and we are the only company providing a wide range of both.<\/p>\n

 <\/strong>As we announced yesterday at NVIDIA GTC, we are now shipping the new A4X Max instances powered by NVIDIA GB300 to our Cloud customers.<\/p>\n

 <\/strong>Our highly sought-after TPU portfolio is led by our seventh generation TPU, Ironwood, which will be generally available soon. We're investing in TPU capacity to meet the tremendous demand we are seeing from customers and partners, and we're excited that Anthropic recently shared plans to access up to one million TPUs.<\/p>\n

 <\/strong>Next, world-class AI research, including models and tooling.<\/p>\n

 <\/strong>Our models are world-leading. Gemini 2.5 Pro, Veo, Genie 3, and our viral sensation Nano Banana are among the very best in class.<\/p>\n

 <\/strong>Over 230 million videos have been generated with Veo 3; and more than 13 million developers have built with our generative models. We're looking forward to the release of Gemini 3 later this year.<\/p>\n

 <\/strong>Our research leadership is advancing next-frontier technologies. Last week, we announced that our Willow quantum chip achieved a major breakthrough, running an algorithm 13,000x faster than one of the world's best supercomputers. And the result is verifiable, paving the way to future practical applications.<\/p>\n

 <\/strong>Speaking of quantum, let me congratulate Michel Devoret, our Chief Scientist for quantum hardware. He received a Nobel in Physics for early research he did in the 1980s. Three Nobels awarded to current Googlers in two years. Incredible!<\/p>\n

 <\/strong>And third, our products and platforms.<\/p>\n

 <\/strong>We're bringing AI to more people and developers than anyone else. In July, we announced that we processed 980 trillion monthly tokens across all our surfaces. We are now processing over 1.3 quadrillion monthly tokens, more than 20x growth in a year. Phenomenal.<\/p>\n

 <\/strong>This quarter, we took big steps to reimagine Chrome as a browser powered by AI through deep integrations with Gemini and AI Mode in Search, with more agentic capabilities coming soon. <\/p>\n

 <\/strong>In August, at Made by Google, we unveiled our Pixel 10 series of devices.  They are the first with our most powerful chip designed to run on Gemini, Tensor G5. They are our best reviewed devices, ever.<\/p>\n

 <\/strong>And last week we launched Android XR, our new operating system, with Samsung's Galaxy XR device. It brings new ways to use headsets and glasses, with Gemini at the core.<\/p>\n

 <\/strong>Now, turning to highlights from Search.<\/p>\n

 <\/strong>AI is driving an expansionary moment for Search. As people learn what they can do with our new AI experiences, they are increasingly coming back to search more. Search and its AI experiences are built to highlight the web, sending billions of clicks to sites every day.<\/p>\n

 <\/strong>During the Q2 call, we shared that overall queries and commercial queries continued to grow year-over-year. This growth rate increased in Q3, largely driven by our AI investments in Search, most notably AI Overviews and AI Mode. Let me dive into the momentum we are seeing.<\/p>\n

 <\/strong>As we've shared before, AI Overviews drive meaningful query growth. This effect was even stronger in Q3 as users continue to learn that Google can answer more of their questions. And it's particularly encouraging to see the effect was more pronounced with younger people.<\/p>\n

 <\/strong>We are also seeing that AI Mode is resonating well with users. In the US, we've seen strong and consistent week-over-week growth in usage since launch, and queries doubled over the quarter.<\/p>\n

 <\/strong>Over the last quarter, we rolled out AI Mode globally across 40 languages in record time. It now has over 75 million daily active users.<\/p>\n

 <\/strong>And we shipped over 100 improvements to the product in Q3 -  an incredibly fast pace. Most importantly, AI Mode is already driving incremental total query growth for Search. Philipp will talk more about monetization, and share how AI is helping people connect with businesses and shop on Search. <\/p>\n

 <\/strong>Next, Google Cloud.<\/p>\n

 <\/strong>Our complete enterprise AI product portfolio is accelerating growth in revenue, operating margins, and backlog. In Q3, customer demand strengthened in three ways.<\/p>\n

 <\/strong>One, we are signing new customers faster. The number of new GCP customers increased by nearly 34% year-over-year.<\/p>\n

 <\/strong>Two, we are signing larger deals. We have signed more deals over $1 billion through Q3 this year than we did in the previous two years combined.<\/p>\n

 <\/strong>Third, we are deepening our relationships. Over 70% of existing Google Cloud customers use our AI products, including Banco BV, Best Buy, and FairPrice Group.<\/p>\n

 <\/strong>As we scale, we are diversifying revenue. Today, 13 product lines are each at an annual run rate over $1 billion, and we are improving operating margin with highly-differentiated products built with our own technology.<\/p>\n

 <\/strong>This deep product differentiation starts with our AI infrastructure. We have a decade of experience building AI Accelerators and today offer the widest array of chips. This leadership is winning customers like HCA Healthcare, LG AI Research, and Macquarie Bank, and it's why nine of the top ten AI labs choose Google Cloud.<\/p>\n

 <\/strong>We are also the only Cloud provider offering our own leading generative AI models, including Gemini, Imagen, Veo, Chirp and Lyria. Adoption is rapidly accelerating. In Q3, revenue from products built on our generative AI models grew more than 200% year-over-year.<\/p>\n

 <\/strong>Over the past 12 months, nearly 150 Google Cloud customers each processed approximately one trillion tokens with our models for a wide range of applications. For example, WPP is creating campaigns with up to 70% efficiency gains. Swarovski has increased email open rates by 17% and accelerated campaign localization by 10x.<\/p>\n

 <\/strong>Earlier this month, we launched Gemini Enterprise, the new front door for AI in the workplace, and we are seeing strong adoption for agents built on this platform. Our packaged enterprise agents in Gemini Enterprise are optimized for a variety of domains, are highly differentiated and offer significant out-of-box value to customers. We have already crossed two million subscribers across 700 companies.<\/p>\n

 <\/strong>Next, YouTube. In the living room, YouTube has remained number one in streaming watch time in the U.S. for more than two years, according to Nielsen.<\/p>\n

 <\/strong>Last month marked YouTube's first time as a live NFL broadcaster. This exclusive global broadcast, live from Brazil, drew more than 19 million fans and set a new record for most concurrent viewers of a live stream on YouTube.<\/p>\n

 <\/strong>YouTube Shorts also continues to perform well. In the US, Shorts now earn more revenue per watch hour than traditional in-stream on YouTube.<\/p>\n

 <\/strong>At our Made on YouTube event, we rolled out a number of AI-powered features that are helping creators supercharge creation and build their businesses.<\/p>\n

 <\/strong>AI is now streamlining the entire content creation workflow, from generative video tools and more efficient editing, to AI-powered insights that help creators optimize their channels. We're also using AI to expand monetization, automatically identifying products to make their videos more shoppable. Philipp will discuss in more detail.<\/p>\n

 <\/strong>And finally, Waymo. Next year, Waymo aims to open service in London, and they're working to bring service to Tokyo. They have also announced expansions to Dallas, Nashville, Denver and Seattle, and secured permission to operate fully autonomously at San Jose and San Francisco airports. Autonomous testing continues to scale in New York City.<\/p>\n

 <\/strong>The new Waymo for Business allows enterprises to offer Waymo as a work travel option. <\/p>\n

 <\/strong>And we launched Waymo Teens accounts in Phoenix this summer. We're pleased to see usage steadily increase, with positive feedback from teens and their parents alike. <\/p>\n

 <\/strong>Waymo's growth and momentum are strong and 2026 is shaping up to be an exciting year. <\/p>\n

 <\/strong>Overall, a milestone quarter. The incredible work of our teams is driving momentum across the board, and our leadership in AI positions us so well for the opportunity ahead.<\/p>\n

 <\/strong>I want to thank all of our partners and our employees for their hard work and an excellent Q3.<\/p>\n

 <\/strong>With that, I'll turn it over to Philipp. <\/p>\n

 Philipp Schindler, SVP and CBO, Google:<\/strong> Thanks, Sundar, and hello, everyone.<\/p>\n

 <\/strong>I'll quickly cover performance for Google Services for the quarter, then structure the rest of my remarks around the great progress we are delivering across Search, Ads, YouTube and Partnerships.<\/p>\n

 <\/strong>Google Services revenues were $87 billion for the quarter, up 14% year-on-year, driven by accelerated growth in Search and YouTube, partially offset by a year-on-year decline in Network revenues.<\/p>\n

 <\/strong>Adding some further color to our results:<\/p>\n

 <\/strong>The 15% increase in Search and Other was led by growth across all major verticals, with the largest contributions from Retail and Financial Services.<\/p>\n

 <\/strong>YouTube saw similar performance across verticals. Its 15% growth in advertising revenues was driven by direct response, followed by brand.<\/p>\n

 <\/strong>Starting with Search and Other revenues which delivered over $56 billion in revenue for the quarter. As Sundar mentioned, AI is driving an expansionary moment and transforming how people use Google Search. Our investments in new AI experiences, such as AI Overviews and AI Mode, continue to drive growth in overall queries, including commercial queries, creating more opportunities for monetization.<\/p>\n

 <\/strong>These AI experiences are enhancing how people connect with businesses and shop on Search. We recently added shopping capabilities in AI Mode, which now help people shop conversationally in Search, and we expanded try-on capabilities to more clothing items, now available to anyone in the U.S.<\/p>\n

 <\/strong>Lastly, we're making it easier for consumers to benefit from deals through new loyalty offerings like personalized annotations on organic results and ads.<\/p>\n

 <\/strong>Looking at monetization, businesses can now tap into our most powerful AI search experiences. Using our most advanced AI models, we can understand and predict intent like never before, unlocking entirely new commercial pathways to provide valuable new consumer connections and helping us monetize even more efficiently.<\/p>\n

 <\/strong>Rolled out globally in September, AI Max in Search is already used by hundreds of thousands of advertisers, currently making it the fastest-growing AI-powered Search Ads product. In Q3 alone, AI Max unlocked billions of net new queries. By delivering the most relevant ad across surfaces and matching advertisers against additional queries they weren't reaching before, AI Max helps advertisers discover new customers at the exact moment they need their product or service.<\/p>\n

 <\/strong>Kayak, for example, looked to grow conversions while staying within their ROAS goals. After turning on AI Max in Search, they grew the conversion value by 12% in early tests.<\/p>\n

 <\/strong>We continue to infuse generative AI capabilities at every step of the marketing process. We rolled out Imagen4 in Asset Studio and Product Studio, helping businesses produce more and better creatives. On the measurement front, we enriched the model supporting Meridian, our Marketing Mix Model, with additional variables. And more granular reporting in PMax is making bidding more effective.<\/p>\n

 <\/strong>Financial Services company SoFi has been using PMax to meet its ambitious growth targets and helped drive a 39% improvement in its conversion volume year-over-year.<\/p>\n

 <\/strong>Moving to YouTube, where we saw accelerated revenue growth.<\/p>\n

 <\/strong>Our recommendation systems are driving robust watch time growth in our key monetization areas like Shorts and Living Room. As we leverage Gemini models, we are seeing further discovery improvement.<\/p>\n

 <\/strong>On direct response, we're excited about the growth in revenue we're seeing, especially from small and medium advertisers adopting Demand Gen.<\/p>\n

 <\/strong>We also improved performance on Demand Gen, with over 100 launches helping to increase conversion value by more than 40% for advertisers using target-based bidding on YouTube. The Retail vertical continues to lead our growth on YouTube, with Demand Gen helping us further monetize shopping-related categories.<\/p>\n

 <\/strong>Looking at the Living Room, our long-term bet, more advertisers are adopting interactive, direct response ads, leading to an annual revenue run rate exceeding $1 billion globally for this format.<\/p>\n

 <\/strong>For our viewers, we continue to give fans greater access across sports, while tapping into the best of YouTube's product innovation and creator-led content. Sundar mentioned that we expanded our NFL partnership with our first-ever exclusive, global broadcast of an NFL game. Brands loved the opportunity, and we sold all our ad inventory within a couple of weeks.<\/p>\n

 <\/strong>Looking at creators, a significant force behind the thriving YouTube creator economy is the collaboration between creators and brands. Tools like direct linking to deals websites in Shorts and swappable brand segments in long-form will soon help creators show how they deliver great value for brands.<\/p>\n

 <\/strong>Thanks to a collaboration with Dude Perfect, Comcast’s Xfinity drove an 8% search lift, beating other Xfinity ads' recall lift on Shorts by 34%. At the same time it decreased the cost per lifted user by 50% when compared to the next most efficient ad.<\/p>\n

 <\/strong>We continue to invest in AI-powered features that are helping creators supercharge creation and build their businesses. With Veo3 integration and Speech to Song, creators go from idea to iteration quicker and new channel insights help them better understand performance.<\/p>\n

 <\/strong>Ending on YouTube with our Subscriptions products, we're also seeing momentum with strong growth in offerings such as YouTube Music & Premium and YouTube TV.<\/p>\n

 <\/strong>We're also applying Gemini internally to help us serve customers with increased speed, intelligence, and efficiency. Our Sales teams use Gemini enriched with Ads knowledge to streamline customer interactions. This increased productivity by over 10%, led to hundreds of millions in incremental revenue, and frees up sellers to engage with more customers at a deeper, more strategic level.<\/p>\n

 <\/strong>In our Customer Support division, Gemini-powered solutions have managed over 40 million customer sessions so far this year and resolved hundreds of thousands of customer inquiries. And we're just getting started.<\/p>\n

 <\/strong>As always, I'll wrap with the progress we're seeing across Partnerships where our customers tap into the strength and breadth of Google's products to accelerate their transformation.<\/p>\n

 <\/strong>Revolut, the global financial services company, leverages Google Cloud's Vertex AI platform and Gemini models to help power its advanced customer service chatbot, develop new hyper-personalized financial products and offer predictive insights. Revolut is also increasing its presence on YouTube, adopting Veo 3 for personalized creatives, making Google a key ads partner for delivering growth and launching new markets.<\/p>\n

 <\/strong>In closing, I'd like to thank Googlers everywhere for their contributions to our success and, as always, to our customers and partners for their continued trust.<\/p>\n

 <\/strong>And, of course, a huge thanks to all of you as we celebrate 25 Years of Google Ads. <\/p>\n

 <\/strong>Anat, over to you!<\/p>\n

 Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thank you, Philipp.<\/p>\n

 <\/strong>My comments will focus on year-over-year comparisons for the third quarter, unless I state otherwise.<\/p>\n

 <\/strong>I will start with results at the Alphabet level, and will then cover our segment results. I'll end with some commentary on our outlook for the fourth quarter of 2025.<\/p>\n

 <\/strong>We had an outstanding quarter in Q3 continuing the strong momentum we've had throughout the year, delivering double-digit revenue growth across Search and YouTube advertising; Subscriptions, Platforms and Devices; and Google Cloud.<\/p>\n

 <\/strong>Consolidated revenue reached $102.3 billion, a 16% year-over-year increase, or 15% in constant currency.<\/p>\n

 <\/strong>Total Cost of Revenue was $41.4 billion, up 13%. TAC was $14.9 billion, up 8%.<\/p>\n

 <\/strong>Other Cost of Revenues was $26.5 billion, up 16%, with the increase primarily driven by content acquisition costs, largely for YouTube, followed by depreciation, and other technical infrastructure operations costs. <\/p>\n

 <\/strong>Total operating expenses increased 28% to $29.7 billion. R&D expenses increased by 22%, driven by compensation and depreciation expenses related to our AI efforts.<\/p>\n

 <\/strong>Sales and Marketing expenses were flat.<\/p>\n

 <\/strong>And G&A expenses increased meaningfully, primarily due to the $3.5 billion charge related to the European Commission fine mentioned in the earnings press release.<\/p>\n

 <\/strong>Operating income increased 9% this quarter to $31.2 billion, and operating margin was 30.5%.Excluding the EC fine, operating income increased 22%, and operating margin was 33.9%.<\/p>\n

 <\/strong>Operating margin benefited from strong revenue growth and continued efficiencies in our expense base, offset by the legal charge and a significant increase in depreciation expense.<\/p>\n

 <\/strong>Other income and expenses was $12.8 billion, primarily due to unrealized gains in our non-marketable equity securities portfolio. <\/p>\n

 <\/strong>Net income increased 33% to $35 billion, and earnings per share increased 35% to $2.87.<\/p>\n

 <\/strong>We generated free cash flow of $24.5 billion in the third quarter and $73.6 billion for the trailing 12 months.<\/p>\n

 <\/strong>Free cash flow in Q3 benefited from strong operating cash flow and recent tax changes regarding the timing of when research and development costs are expensed and assets are depreciated. This was partially offset by higher CapEx.<\/p>\n

 <\/strong>We ended the quarter with $98.5 billion in cash and marketable securities.<\/p>\n

 <\/strong>Turning to segment results. Google Services revenues increased 14% to $87.1 billion, reflecting strength in Google Search, YouTube advertising, and Subscriptions. <\/p>\n

 <\/strong>Google Search and Other advertising revenues increased by 15% to $56.6 billion, representing another robust quarter with continued growth across all major verticals, with the largest contributions from Retail and Financial Services.<\/p>\n

 <\/strong>YouTube advertising revenues increased 15% to $10.3 billion, driven by direct response advertising, followed by brand.<\/p>\n

 <\/strong>Network advertising revenues of $7.4 billion were down 3%.<\/p>\n

 <\/strong>Subscriptions, Platforms and Devices revenues increased 21% this quarter to $12.9 billion, driven by very strong growth in both YouTube and Google One subscriptions.<\/p>\n

 <\/strong>Google Services operating income increased 9% to $33.5 billion. Operating margin declined year-over-year to 38.5%, as healthy revenue growth and continued efficiencies in our expense base were offset by the impact of the EC fine, which was fully reflected in the Google Services segment.<\/p>\n

 <\/strong>Turning to the Google Cloud segment, which again delivered very strong results this quarter as Cloud continued to benefit from our enterprise AI optimized stack, including our own custom TPUs and our industry-leading AI models.<\/p>\n

 <\/strong>Cloud revenue increased by 34% to $15.2 billion in the third quarter, driven by strong performance in GCP, which continued to grow at a rate that was much higher than Cloud's overall revenue growth rate.<\/p>\n

 <\/strong>GCP's growth was driven by enterprise AI products, which are generating billions in quarterly revenue.We had strong growth in enterprise AI Infrastructure and enterprise AI solutions, which benefited from demand for our industry-leading models, including Gemini 2.5.<\/p>\n

 <\/strong>Core GCP was also a meaningful contributor to growth.<\/p>\n

 <\/strong>And we had double-digit growth in Workspace, which was driven by an increase in average revenue per seat and the number of seats.<\/p>\n

 <\/strong>Cloud operating income increased by 85% to $3.6 billion, and operating margin increased from 17.1% in the third quarter last year to 23.7% this quarter.<\/p>\n

 <\/strong>The expansion in Cloud operating margin was driven by strong revenue performance and continued efficiencies in our expense base, partially offset by higher technical infrastructure usage costs, which includes depreciation expense and other operations costs, such as energy.<\/p>\n

 <\/strong>Google Cloud's backlog increased 46% sequentially and 82% year-over-year, reaching $155 billion at the end of the third quarter. The increase was driven primarily by strong demand for enterprise AI.<\/p>\n

 <\/strong>As Sundar mentioned earlier, Cloud has signed more billion-dollar deals in the first nine months of 2025 than in the past two years combined.<\/p>\n

 <\/strong>In Other Bets, revenues were $344 million, and operating loss was $1.4 billion in the third quarter.<\/p>\n

 <\/strong>Within Other Bets, we continue to allocate more resources to businesses like Waymo, where we see opportunities to create substantial value.<\/p>\n

 <\/strong>With respect to CapEx in the third quarter, our CapEx was $24 billion. The vast majority of our CapEx was invested in technical infrastructure, with approximately 60% of that investment in servers and 40% in data center and networking equipment. <\/p>\n

 <\/strong>In Q3, we returned capital to shareholders through repurchases of stock of $11.5 billion and dividend payments of $2.5 billion.<\/p>\n

 <\/strong>Turning to our outlook, I would like to provide some commentary on factors that will impact our business performance in the fourth quarter of 2025, as well as an updated outlook for CapEx for the year.<\/p>\n

 <\/strong>First, in terms of revenues, we're pleased with the overall momentum of our business. At the current spot rates, we could see an FX tailwind to our revenues in Q4. However, the volatility in exchange rates could affect the impact of FX on Q4 revenues. <\/p>\n

 <\/strong>As for our segments, in Google Services, year-over-year comparisons in Advertising will be negatively impacted by the strong spend on U.S. elections in the fourth quarter of 2024, particularly on YouTube.<\/p>\n

 <\/strong>In Cloud, demand for our products remains high as evidenced by the accelerated revenue growth and the $49 billion sequential increase in Cloud backlog in Q3.<\/p>\n

 <\/strong>In GCP, we see strong demand for enterprise AI Infrastructure, including TPUs and GPUs, Enterprise AI Solutions, driven by demand for Gemini 2.5 and our other AI models, and core GCP infrastructure and other services, such as Cybersecurity and Data Analytics.<\/p>\n

 <\/strong>As I've mentioned on previous earnings calls, while we have been working hard to increase capacity and have improved the pace of server deployments and data center construction, we still expect to remain in a tight demand\/supply environment in Q4 and 2026.<\/p>\n

 <\/strong>Moving to investments. We're continuing to invest aggressively due to the demand we're experiencing from Cloud customers as well as the growth opportunities we see across the company.<\/p>\n

 <\/strong>We now expect CapEx to be in the range of $91 billion to $93 billion in 2025, up from our previous estimate of $85 billion, keeping in mind that the timing of cash payments can cause variability in the reported CapEx number.<\/p>\n

 <\/strong>Looking out to 2026, we expect a significant increase in CapEx and will provide more detail on our fourth quarter earnings call.<\/p>\n

 <\/strong>In terms of expenses, first, as I've mentioned on previous earnings calls, the significant increase in our investments in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expenses and related data center operations costs, such as energy.<\/p>\n

 <\/strong>In the third quarter, depreciation increased $1.6 billion year-on-year to $5.6 billion, reflecting a growth rate of 41%. Given the overall increase in CapEx investments, we expect the growth rate in depreciation to accelerate slightly in Q4.<\/p>\n

 <\/strong>Second, we expect sales and marketing expenses to be more heavily weighted to the end of the year, in part to support product launches and the holiday season.<\/p>\n

 <\/strong>Q3 was a strong quarter and we're excited with the adoption of our AI products, helped by a rapid pace of innovation and great execution by our teams. This translated into strong momentum in Search; YouTube Ads; Subscriptions, Platforms and Devices; and Cloud, resulting in our first $100 billion-plus quarter.<\/p>\n

 <\/strong>Now, Sundar, Philipp, and I will now take your questions. <\/p>\n

 Operator:<\/strong> Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated. Our first question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>\n

 Brian Nowak (Morgan Stanley): <\/strong>Great. Thanks for taking my questions, everyone. <\/p>\n

 <\/strong>The first one, maybe for Philipp or Sundar, it's on agentic e-commerce and agentic travel. There's a lot of external Wall Street discussion about agentic e-commerce potentially monetizing at a lower rate than Search.<\/p>\n

 <\/strong>So the question is: What factors are you most focused on to sort of ensure a smooth transition for your Search business and for your advertisers as you move over to a more agentic world?<\/p>\n

 <\/strong>And the second one, Sundar, is on Waymo. How far are we from an integration of Waymo into more of the core Gemini capabilities and the users on the platform taking your user data,; where I'm going, what hotel I'm staying at, what airport I'm staying at, and integrate that into Waymo, so you can actually have users use their profiles to pre-schedule Waymos? How far off is that? What do we have to do? <\/p>\n

 Philipp Schindler, SVP and CBO, Google: <\/strong>Hello, Brian. Great question. <\/p>\n

 <\/strong>This is all early, but we see agentic experiences really as additive to the way people seek information. It helps us answer people's tough questions. It helps people get stuff done, and it helps businesses in the process. And we're working on multiple agentic experiences across key verticals, such as Travel, Commerce, Shopping, and so on.<\/p>\n

 <\/strong>And we're paying a lot of attention to creating a seamless user experience but also to the fact that we need to integrate different partner ecosystems in a way that it creates value for them.<\/p>\n

 <\/strong>By the way, we're also working closely with a lot of our partners on the other side through our Cloud services to improve their own agentic experiences.<\/p>\n

 <\/strong>So maybe we go a little deeper on the shopping side where we actually use AI already, very actively, to improve the shopping experience.<\/p>\n

 <\/strong>As you know, we launched a more visual experience on AI Mode. That gives people a much more intuitive, conversational way to shop. You can simply describe what you're looking for now, like the way you talk to a friend, and it will show you the visual shopping results.<\/p>\n

 <\/strong>And then we think about building an agentic shopping future, and it has to be one, again, that benefits both users and merchants here and you know that AI Mode also introduced new agentic checkout, which will let shoppers use like agentic AI to buy products from merchant sites and so on. <\/p>\n

 <\/strong>We have a partnership with Paypal to help merchants build agentic commerce experiences. We have new open protocols for agent-to-agent transactions and so on and so on. <\/p>\n

 Sundar Pichai, CEO, Alphabet and Google: <\/strong>And, Brian, on Waymo, great question. I was reflecting, I think, on the exact same topic. I'm scheduled to meet with the team to do a review on it in a few weeks out.<\/p>\n

 <\/strong>It is an exciting time. Waymo clearly is scaling up, particularly in 2026. And I think the possibility, as you said, of Gemini, particularly with the multimodal experience, as well as services like YouTube, I think there's a real opportunity to make the in-car experience dramatically better. Definitely something we are excited about, and you'll see newer experiences in 2026 for sure.<\/p>\n

 Brian Nowak (Morgan Stanley):<\/strong> Great, thank you both. <\/p>\n

 <\/strong>Operator: <\/strong>Our next question comes from Doug Anmuth with JP Morgan. Your line is now open. <\/p>\n

 <\/strong>Doug Anmuth (JP Morgan):<\/strong> Thanks for taking the questions.<\/p>\n

 <\/strong>Philipp, maybe you can just talk more about some of those drivers of the core Search strength.<\/p>\n

 <\/strong>I guess, in particular, when you think about AI Overviews and AI Mode, we know that query growth is accelerating, but can you help us understand from there, kind of what happens in terms of clicks per query and conversion rates and pricing in these AI-driven Search formats?<\/p>\n

 <\/strong>And then, Anat, can you talk about where you see opportunities in the core cost space as you look to make room to absorb the rapid growth in infrastructure and depreciation going forward? Thanks. <\/p>\n

 Philipp Schindler, SVP and CBO, Google: <\/strong>So, let me give you a bit of vertical color first. In Q3, Search and Other revenues, again, delivered growth across all major verticals, as we said. It was from Retail and Financial Services. Healthcare was also the contributor to the growth here. <\/p>\n

 <\/strong>Our new AI experiences, you mentioned them, AI Overviews, AI Mode, continue to drive growth in overall queries, including commercial queries, really creating more opportunities for monetization. AI Overviews are scaling up and are working for our entire user base. We're now scaled to over two billion users here, and we're continuing to expand ads in AI Overviews in English to more countries across desktop, mobile, and so on.<\/p>\n

 <\/strong>And as I've shared before for AI Overviews, even at our current baseline of ads, below and within the AI response, overall, we see the monetization at approximately the same rate.<\/p>\n

 <\/strong>So over time, we're excited about the opportunity of richer experiences in AI Mode and AI Overviews to basically open up the opportunity for also much richer placements.<\/p>\n

 <\/strong>I think as I've said on a prior call, we manage the business to drive great outcomes for our users and an attractive ROI for our advertisers. We don't really manage to paid clicks and CPC targets, but as you will see in the 10-Q, paid clicks were up 7% year-on-year, and CPCs were up 7% year-on-year.  <\/p>\n

 Anat Ashkenazi, SVP and CFO, Alphabet and Google:<\/strong> Doug, and to your question around where else can we see more opportunity for efficiency and productivity, and I think you've heard me say before, this is not a one-time type of effort, but rather an ongoing way in which we manage the business. <\/p>\n

 <\/strong>And the key here is that the more we drive productivity across our business, the more we can invest in the business for growth, and obviously, continue to drive improvement in the P&L. <\/p>\n

 <\/strong>Some of the areas are things that you've heard us talk about in the past such as moderating the pace of headcount growth, optimizing real estate footprint, but also, as we invest more and more in our technical infrastructure, ensuring that we are optimizing that build-out and the overall technical infrastructure we have. You know that a lot of the data centers, for example, we build ourselves, so they're optimized, and we make sure we do them in the most efficient way.<\/p>\n

 <\/strong>Sundar mentioned on one of the previous calls the productivity associated with leveraging AI for Google. So there's the example, the percent of code, now nearly half of all code generated by AI, that's the way for us to leverage AI to drive further productivity across the business.<\/p>\n

 <\/strong>And obviously, we always look at making sure that when we provide services or products that we get the right economics and the right value for what we provide. So one good example is Shorts, which has a lower revenue share than in-stream, it helps to improve some of our gross margins.<\/p>\n

 <\/strong>So, this is an effort we have ongoing. I've mentioned in the past that we have a headwind with depreciation, obviously, increasing alongside our CapEx increase. So we have efforts across the organization to ensure we run the business in the most disciplined and productive way, while continuing to invest for future growth. <\/p>\n

 Doug Anmuth (JP Morgan):<\/strong> Thank you both.<\/p>\n

 Operator: <\/strong>Our next question comes from Eric Sheridan with Goldman Sachs. Your line is now open. <\/p>\n

 Eric Sheridan (Goldman Sachs): <\/strong>Thank you so much for taking the questions. Maybe two, if I could.<\/p>\n

 <\/strong>Sundar, when you think about your custom silicon efforts across the organization, can you reflect a little bit about the opportunity set you see with each passing generation of custom silicon, both in terms of driving operating efficiencies inside the organization and potentially increased monetization efforts around those outside of the organization?<\/p>\n

 <\/strong>Second question would be for Philipp. Obviously, we can see the YouTube Advertising revenue number in the reported results. Can you reflect a little bit about the scaling of the subscription side of YouTube offerings and how the two parts together maybe represent an interesting framework in thinking about the monetization side of YouTube increasingly being a mix of both Ads and Subscriptions? Thank you. <\/p>\n

 Sundar Pichai, CEO, Alphabet and Google:<\/strong> Eric, overall, I would say we are seeing substantial demand for our AI infrastructure products, including TPU-based and GPU-based solutions. It is one of the key drivers of our growth over the past year, and I think on a going-forward basis, I think we continue to see very strong demand, and we are investing to meet that.<\/p>\n

 <\/strong>I do think a big part of what differentiates Google Cloud, effectively, we have taken a deep full-stack approach to AI, so we are -- and that really plays out. We are the only hyperscaler who is really building offerings on our own models.<\/p>\n

 <\/strong>And we are also highly differentiated on our own technology. So to your question, I think that does give us the opportunity to continue driving growth in operating margins in Cloud, as we have done in the past.<\/p>\n

 <\/strong>And also, I think from a revenue sets, the infrastructure portion of our business to be a growth driver looking ahead as well. <\/p>\n

 Philipp Schindler, SVP and CBO, Google:<\/strong> And to the second part of your question, look, just taking a quick step back, you know we often describe YouTube's business as a flywheel. Obviously, it first all starts with the creators, and we have significantly invested here to be the place that YouTube creators really call their home. That's a big piece of it, the number one piece.<\/p>\n

 <\/strong>Viewers, of course. YouTube has billions of monthly logged in users, and every day, people watch billions of hours of video. And we talked about how our recommendation systems are driving robust watch time growth, and so on and so on.<\/p>\n

 <\/strong>So, on the monetization side, YouTube's business is really powered, I would say, let's call it a twin engine monetization strategy, combining its advertising business and its growing subscription services.<\/p>\n

 <\/strong>Both YouTube Ads and Subscriptions saw strong growth this quarter. And so looking at YouTube Music & Premium, users are on average delivering more value to creators, to music, media partners, and YouTube itself than even ad-supported users do.<\/p>\n

 <\/strong>So, in other words, on average, a YouTube Music & Premium subscriber generates a meaningful, high-gross profit than they were as simply an ad-supported users. And fans come from all over the world, and they send this engagement through Ads and Subscription, which generates YouTube's revenues, and funds, is what I started with, these creators here, and this drives more viewership and engagement and so on. And that's the flywheel.And so our priority continues, like this growth cycle, we're happy with this twin-engine monetization strategy. <\/p>\n

 Operator:<\/strong> Our next question comes from Mark Shmulik with Bernstein. Your line is now open. <\/p>\n

 Mark Shmulik (Bernstein): <\/strong>Yes. Thanks for taking the questions.<\/p>\n

 <\/strong>Sundar, with the strong adoption of Gemini AI Mode and Overviews across the user base, are there any meaningful differences to call out kind of around the behavior and depth of engagement for those users across the entire Google ecosystem?<\/p>\n

 <\/strong>And then, Philipp, I know we kind of ask this most quarters, but I'm curious with some of the adoption you've seen around AI Overviews and Mode, how do you see the economics of Search evolving with the higher commercial and total query volume and how it kind of compares against the incremental cost to deliver these results. Thank you. <\/p>\n

 Sundar Pichai, CEO, Alphabet and Google: <\/strong>Mark, look, I think obviously, AI Overviews are a natural part of the Google experience, and so engagement is very high. <\/p>\n

 <\/strong>I would say AI Mode, you have varied cohorts. There are people who are casual users who are checking it out. And then, there's a core group which really likes AI Mode and is passionate about it, and so you see the early adopters. The product is resonating very strongly, and they are seeking it out. So, I think that's how I would highlight the difference. With Gemini, again, sort of engaged user base who are seeking out the product and so on.<\/p>\n

 <\/strong>But across the board, I think the trajectory has been we are definitely seeing in each of those use cases a set of early adopters, and then more people coming in, and the people who are using it continue to use it more over time and report high user satisfaction.<\/p>\n

 <\/strong>So I would say the underlying product metrics now are pretty encouraging to see as well. <\/p>\n

 Philipp Schindler, SVP and CBO, Google: <\/strong>Look, and to the second part of your question, I think we covered before. Sundar covered the query development. And as I've just said before, for the AI Overviews, even at our current baseline of ads, whether above, below, and within the AI response, overall, we see the monetization at approximately the same rate, and this is a great baseline for further innovation. We talked about this. We're excited about where this can go.<\/p>\n

 <\/strong>And on the AI Mode side, we're testing ads in AI Mode, and we'll continue to test and learn before we expand this any further. So this in combination with what we mentioned about the commercial query overall development, I think we're in a good place here.<\/p>\n

 <\/strong>You could also argue that on queries that historically have not been well-monetized, we think there's a potential opportunity here where you can obviously imagine that we can build this out with smart AI integration. <\/p>\n

 Operator:<\/strong> Our next question comes from Michael Nathanson with MoffettNathanson. Your line is now open. <\/p>\n

 Michael Nathanson (MoffettNathanson):<\/strong> Thanks. I have two; one for Philipp and one for Anat.<\/p>\n

 <\/strong>Philipp, it's clear that when people use AI Mode, the query length is much longer. Can you talk about how that longer length may be impacting your ability to drive ROAS and what you're seeing in terms of some of the early benefits of maybe longer query length?  <\/p>\n

 <\/strong>And then, Anat, you came to Alphabet from a pharmaceutical company. You've been there more than a year. Can you talk a bit about how you're working to look at ROIC internally, and what early signs are you seeing that gives you confidence that the spending is really driving better returns longer term? Thanks. <\/p>\n

 Philipp Schindler, SVP and CBO, Google:<\/strong> Look, as Sundar shared, AI Mode has over 75 million daily active users and in the U.S. we see strong and consistent week-over-week growth in usage since launch, and the queries doubled over the quarter. <\/p>\n

 <\/strong>And as I also mentioned, we're testing ads in AI Mode. We'll continue to test before we expand any further. It's really too early to tell and go into any of the details of that testing.<\/p>\n

 Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Yes, and the question related to ROIC and how we look at just overall our business and where do we see early signs that are encouraging.<\/p>\n

 <\/strong>So first, I would say it's not just early signs, because we're seeing returns, obviously, in the Cloud business. You've heard us talk about the fact that we already are generating billions of dollars from AI in the quarter.<\/p>\n

 <\/strong>But then across the board, we have a rigorous framework and approach by which we evaluate these long-term investments that are meant to do two things. One is to ensure we build a resilient growth profile for the company, but also that we meet the demand of the customers that we have here in the near and mid-term.<\/p>\n

 <\/strong>So we look at it across the business. We evaluate the potential return for each one of them, whether it's in Cloud, and I think that's more visible, obviously, externally given that you see the revenue generated and the fact that we're unable to meet at this point customer demand. We have more demand than we have supply.<\/p>\n

 <\/strong>In our Ads business, you see the fact that we're investing to transform Search, as you heard from Philipp and Sundar with AIO and AI Mode. So we're excited to see how the investments are helping advertisers as well.<\/p>\n

 <\/strong>YouTube where it is helping power recommendations. So when we make a decision on investment in the long-term, we go through a very rigorous process of assessing what the return could be and over what timeframe we will see that return to give us the high level of confidence to then invest and make those investments for the long-term.<\/p>\n

 <\/strong>So it's a very rigorous approach. <\/p>\n

 Michael Nathanson (MoffettNathanson):<\/strong> Thanks. <\/p>\n

 Operator: <\/strong>Our next question comes from Ross Sandler with Barclays. Your line is now open. <\/p>\n

 Ross Sandler (Barclays): <\/strong>Great. About 20% of Google's Search queries are commercial historically, and you talked a bunch on this call about how AI Overviews are kind of expanding the breadth of queries. Could you talk about how new products on the monetization side, like AI Max, are potentially increasing the percent of commercial queries? <\/p>\n

 Philipp Schindler, SVP and CBO, Google:<\/strong> So, look, AI Max -- and I mentioned this in my call before -- improves the ability for advertisers to target a wider range of queries. Separately, there is the question of whether queries actually increase with AI Mode; and Sundar actually talked about it and mentioned the opportunity that he sees here. So I think it's important to separate those two things.<\/p>\n

 <\/strong>And I personally also see, this is what I just said in my last remark, that I think over time, there's an opportunity to actually take, let's say, queries that are not fully commercial but could have an adjacent commercial relationship, to basically expand this into more attractive ads offerings, while creating a really interesting user experience at the same time. <\/p>\n

 Sundar Pichai, CEO, Alphabet and Google: <\/strong>The only thing I would add is, just stepping back broadly, I think AI Overviews and AI Mode are dramatically improving Search. We can see it in user satisfaction, user quality, all our metrics. And they're universal in nature. They apply across the universality of human needs. So I think we are seeing it in breadth. And so, naturally over time, that'll apply to commercial categories as well.<\/p>\n

 Operator:<\/strong> Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>\n

 Ken Gawrelski (Wells Fargo): <\/strong>Thank you very much. Two questions, please.<\/p>\n

 <\/strong>First, it appears more and more clear that all the new modes at Google, with Gemini, AI Overviews, AI Mode, even ChatGPT, is growing the addressable market for engagement in search-like behavior. Could you talk about what gives you confidence that it will also grow the addressable market for marketing activity and overall revenue associated with that behavior? That's question one.<\/p>\n

 <\/strong>Question two is just more about, as you think about AI Mode, AI Overviews, and traditional Google Search, how do you think, do you see a world in 12 to 24 months, those all co-exist, and does the user eventually pick what mode they want? Does the algorithm pick the mode? Can you talk a little bit about how you think that will progress over the next 12 to 24 months? Thank you very much. <\/p>\n

 Sundar Pichai, CEO, Alphabet and Google:<\/strong> Ken, thanks.<\/p>\n

 <\/strong>Look, I think it's a dynamic moment, and I think we are meeting people in the moment with what they are trying to do.<\/p>\n

 <\/strong>Obviously, Search is evolving, and between AI Overviews and AI Mode, I think we are able to kind of give that range of experience for people in this moment.<\/p>\n

 <\/strong>Over time, you can expect us to make the experiences simpler in a way that -- just like we did universal search many, many years ago, we may have done text search, image search, video search, et cetera, and then we brought it together as universal search.So you will see evolutions like that, but I think we want to be sensitive to making sure that we are meeting the users in terms of what they are looking for.<\/p>\n

 <\/strong>I think Gemini allows us to build a more personal, proactive, powerful AI assistant for that moment, and I think having the two surfaces, Search and Gemini, allows us to really serve users across the breadth of their needs.But over time, we will thoughtfully look for opportunities to make the experience better for users.<\/p>\n

 <\/strong>And to the first part, I would broadly say, I do think we have been consistently saying for a while now this is an expansionary moment, and we are seeing people engage more, and I think when they do that, naturally, a portion of that information for users, those journeys are commercial in nature. So I would expect that to play out over time as well.<\/p>\n

 Operator:<\/strong> Our last question comes from Justin Post with BAML. Your line is now open. <\/p>\n

 Justin Post (BAML):<\/strong> Great. Just a couple.<\/p>\n

 <\/strong>Sundar, I think you mentioned Gemini 3 is coming. Maybe you could comment on the pace of innovation in frontier models. Is there still just a tremendous amount of innovation, or is it slowing at all?<\/p>\n

 <\/strong>And then, you mentioned a number of large deals signed in the last nine months for Cloud, which is great. Any changes in the economics of these deals, as far as long-term profitability? Anything we should be aware of? Thank you. <\/p>\n

 Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Justin.<\/p>\n

 <\/strong>The first, on the pace of frontier model research and development. Look, I think two things are both simultaneously true. I'm incredibly impressed by the pace at which the teams are executing and the pace at which we are improving these models.<\/p>\n

 <\/strong>But it also is true at the same time that each of the prior models you're trying to get better over is now getting more and more capable.<\/p>\n

 <\/strong>So I think both the pace is increasing, but sometimes we are taking the time to put out a notably improved model. So I think that may take slightly longer.<\/p>\n

 <\/strong>But I do think the underlying pace is phenomenal to see, and I'm excited about our Gemini 3.0 release later this year.<\/p>\n

 <\/strong>On Cloud, I would point out as a sign of the momentum, I think the number of deals greater than $1 billion that we signed in the first three quarters of this year are greater than the two years prior. So we are definitely seeing strong momentum and we are executing at pace.<\/p>\n

 <\/strong>And in terms of long-term economics, I would say that, again, us being a full-stack AI player, and the fact that we are developing highly differentiated products on our own technology I think will help us drive a good trajectory here, as you have seen over the past few years. <\/p>\n

 Justin Post (BAML):<\/strong> Thank you.<\/p>\n

 Operator: <\/strong>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. <\/p>\n

 Jim Friedland, Head of Investor Relations:<\/strong> Thanks, everyone, for joining us today. We look forward to speaking with you again on our Fourth Quarter 2025 call. Thank you, and have a good evening.<\/p>\n

 Operator: <\/strong>Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect. <\/p>\n





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Jim Friedland, Head of Investor Relations: <\/strong> Hi, everyone. Thanks for joining our Data Center Energy Strategy call today. I'm Jim Friedland, Head of Investor Relations for Alphabet, and we're pleased to be joined today by our subject matter expert, Amanda Peterson Corio, Global Head of Data Center Energy. Also with me on the call today is Nathalia Valdes from the IR team - who many of you know, and she will be helping guide the discussion today. <\/p>\r\n

We would like to thank those who sent in questions ahead of time. We received a number of questions. On today's call, we will address the most common questions that you shared with us. I'll now turn the call over to Amanda.<\/p>\r\n

Amanda Peterson Corio, Global Head of Data Center Energy: <\/strong> Hi, everyone. Thanks so much for having me. My name is Amanda Peterson Corio, and I do lead Google's Global Energy and Power team. <\/p>\r\n

It's a pleasure to be with you today. I'm looking forward to answering all the questions that you've submitted. But first, let me tell you a little bit more about myself and the team.<\/p>\r\n

Personally, I have over 20 years of both domestic and international experience in energy, power, and infrastructure. I spent my career, prior to Google, investing in, developing, and managing large scale, wholesale, power plants. I have been at Google for nearly 10 years, and today I have the honor of overseeing our Global Energy team, which really enables the backbone of Google's infrastructure, powering our global operations.<\/p>\r\n

We do this by working with communities, utilities, governments, regulators, and other power users that we partner with and often develop innovative solutions to accelerate the rollout of advanced power technologies to meet our growth and our decarbonization goals, as well as to improve grid reliability and think about energy affordability.<\/p>\r\n

Our team's mission is to enable Google to meet the company's power needs by ensuring responsible power infrastructure delivery that is affordable, reliable, and sustainable. And our track record over the last 15 years demonstrates this commitment. Since 2010, Google has signed over 170 agreements to purchase more than 22 gigawatts of clean energy worldwide, designed market leading solutions to balance the needs of our growth, utilities planning, and customer protection and we have entered into and invested over $3.7 billion in clean energy projects and partnerships.<\/p>\r\n

Today, we're on the cusp of a new era, this era of innovation and growth that is powered by AI. Google customers and users need high performance computing around the clock, and demand for our services is growing every year, which is driving continued growth in our energy use as more and more people and organizations choose to use our products and services.<\/p>\r\n

Meeting this growing demand is both one of the key challenges and opportunities of our time. And Google is steadfast in our commitment to meet this moment responsibly by being a good grid citizen.<\/p>\r\n

Over the past decade at Google, we've built a sophisticated energy infrastructure team that has decades of energy, utility, and global power market experience. We provide the structure, the tools and solutions that drive scalable system change to meet our growing electricity demand worldwide. <\/p>\r\n

So thank you again for having me today, and I look forward to answering your questions. <\/p>\r\n

Nathalia Valdes, Investor Relations: <\/strong> Thank you, Amanda. Good morning, everyone. As you mentioned, we received many questions ahead of this call. We'll discuss the topics that were most frequently raised. <\/p>\r\n

So Amanda, given the pace of change you just highlighted, if we look at this year versus last year, what have been the most significant changes to Alphabet's overall energy strategy? <\/p>\r\n

Amanda Peterson Corio, Global Head of Data Center Energy: <\/strong> Yeah, it's a great question. I think to understand where we are today, it's important to reflect back on the fact that just a year ago, the power and utilities industry was only just beginning to think about growing electricity needs for the first time in decades. <\/p>\r\n

Now electricity needs are front and center for Google data centers, and it's led us to focus on an “energy first” mindset on how we approach securing power supply for our operations. This means that we are assessing the power supply, reliability, and impact upfront before we make an investment. We also analyze how our presence in certain locations impacts the communities and how we can show up to be a good grid citizen, by catalyzing grid investments and helping to make more affordable, reliable, and clean energy available on our systems.<\/p>\r\n

I will say that there is no “one size fits all” solution on how we can deliver power globally and that's because while the power infrastructure may look the same physically everywhere in the world, the electricity and regulatory market structures vary greatly across the many markets where we operate.<\/p>\r\n

The good news is that, as I mentioned, we have a team of industry leading experts across our global markets operating here, and we've had this benchmark team preparing for this moment, for scale development for power over the course of many years. We've been moving Google from a power customer to an infrastructure partner to be able to meet the needs of today. <\/p>\r\n

It's our ability to deeply understand the power and utility sector and design scalable solutions that work in both regulated and deregulated markets alike, that I believe truly set us apart for success to deliver and meet these needs. <\/p>\r\n

Nathalia Valdes, Investor Relations:<\/strong> Thank you, Amanda. Translating that “energy first” mindset into execution brings us to the next question from our investors. How does your team work with utility partners and regulators to ensure that the new power demand doesn't strain existing grid capacity?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy:<\/strong>  Yeah, and this is another great question. <\/p>\r\n

Before we make any decisions or break ground on our own development, the first conversation we usually have is with our partners, both at the state and local level, as well as our utility partners to really understand where within the system it makes sense to cite a load like ours. <\/p>\r\n

So we ask: Is it going to be helpful? Is it going to incur any additional strain or require extraordinary amounts of new infrastructure in the time to serve? And when we start to have this dialogue and conversations, we start to plan out what is needed and where does it make the most sense to put our load. It starts with the partnership there.<\/p>\r\n

Now, how we go about it and how we work with state regulators and our utility partners, again, differs depending on the energy market where we operate. But the most important thing we learned along the way is the value of transparency. And this goes both ways. So both for Google to be open and transparent about what we are working to build, as well as understanding what our partners' needs are, including the challenges, and how we can work together to have a successful integration of our loads within a shared utility grid. <\/p>\r\n

Nathalia Valdes, Investor Relations: <\/strong>Asking a question more specifically, how do you ensure that utility costs for consumers won't be higher as a result of these new data centers?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong> Yeah, Google has a responsible growth strategy in place to prevent our expansion from burdening local communities or energy users. <\/p>\r\n

We, again, proactively collaborate with our utility partners and regulators to make sure that the cost of new infrastructure that is required to meet our growth is paid for by Google. <\/p>\r\n

So in Georgia, for example, the Public Service Commission and local utility have both credited large load customers like Google for their ability to freeze base rates for their customers over the next three years. <\/p>\r\n

Google's also utilizing innovative structures, like our Capacity Commitment Framework, which empowers the utilities to make long term infrastructure investments with greater revenue certainty. This is ensuring power for Google while also ensuring the cost of our infrastructure required to serve us, is paid by us and not by others. This framework has proven to be a scalable solution to address affordability concerns by the growth of data center infrastructure. And since we introduced it last year by working in concert with our partners, we have seen it be adopted in 8 states, and it's pending more approval over time.<\/p>\r\n

Google also partners with the local community where our data centers operate to support energy affordability and reduce household energy burdens in our communities. So for example, just last week in Texas, we announced a $30 million Energy Impact Fund to help scale critical affordability initiatives throughout state. <\/p>\r\n

And this is similar to programs that we've announced previously in Arkansas, just last month, which builds on the broader programs we funded for the years in North and South Carolina, as well as in other states. This funding includes focus on weatherization and pre-weatherization of community homes, reducing the energy burden, and energy efficiency upgrades for local communities, homes, and public schools. <\/p>\r\n

Nathalia Valdes, Investor Relations:<\/strong>  As you think about the next 3 to 5 years, could you walk us through the most critical current bottlenecks in securing power for our data centers? Is the primary constraint today power availability, or construction labor and trade resources?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong> Yeah, there are a number of current bottlenecks. <\/p>\r\n

The first is really access to power capacity. This is really caused by the underinvestment of the build out of infrastructure of our grids that has happened previously, combined with the growing demand that we're seeing now of the electrification of everything, including the growth of our data centers. And it's really created the need for greater capacity build out.<\/p>\r\n

Now, it could be capacity that's constrained either by the need for new transmission or the need for new generation. In some cases, there's plenty of generation capacity, but there isn't enough room on the wires to deliver the power to where it's needed. Or conversely, there could be enough generation transmission but not enough generation. You can even have both, in some cases, be the constraining factor.<\/p>\r\n

I think you've also hit on a critical point, that the bottleneck for deploying compute capacity, as well as the build out of needed infrastructure, is the need for skilled labor required to build and connect that power. It's really a both\/and. <\/p>\r\n

There's a well known shortfall in the U.S. of U.S. electrical workers that are going to be required to modernize our grids. An independent study estimated that 130,000 additional electricians will be needed by 2030 to build out new data centers and manufacturing facilities alone. And it's estimated that nearly 10,000 American electricians either retire or change their careers each year, with only 7,000 new entrants joining the field. <\/p>\r\n

So to help fill this gap, Google announced support earlier this year for an effort to train 100,000 electrical workers and 30,000 new apprentices in the U.S. through Google.org funding to the Electrical Training Alliance. Thanks to the investment, the Alliance aims to increase the electrical workforce pipeline by 70% within the next five years, setting a model that we hope for how public and private sectors can collaborate to quickly deploy the workforce required to meet this bottleneck. <\/p>\r\n

Nathalia Valdes, Investor Relations:<\/strong> So when you think about sourcing power for newer data centers, do you want to be connected directly to the power, so behind the meter? Do you want to connect directly to the grid? Or a mix of both?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong> This is a question we increasingly get more and more. <\/p>\r\n

As I mentioned earlier in the call, there's no one size fits all solution. The grid provides strong and efficient resiliency as a system. It creates redundancy of power supply and efficiency of pooled assets that really helps to optimize cost and an efficient power system to deliver that power to all customers.<\/p>\r\n

So for that reason, we prioritize grid connected load that is served by grid-connected generations, using transmission lines to transport the power between the two. There are plenty of untapped efficiencies that can be unlocked in our electricity grids today to provide timely access to capacity and growth. In fact, the U.S. Department of Energy has estimated that even if the U.S. does not build another megawatt, it can unlock 100 gigawatts of extra power just by modernizing the current U.S. transmission and distribution system to be more efficient.<\/p>\r\n

At Google, we support policy and utility measures that can unlock grid connected energy supplies for data centers, including measures that accelerate deployment of advanced transmission technologies and permitting reforms that can speed construction of new transmission lines. <\/p>\r\n

However, given significant transmission constraints on electricity grids across the country, this preferred model is not always an option to us. Further, as we discussed, there is no ‘one size fits all.’ So for example, in markets where it is regulatorily allowed, we do explore co-location of generation of our data centers with generation and our data centers while still building a path to ultimately interconnect these co-located power and data center assets to the grid. <\/p>\r\n

So we are working with our utility partners, our generation owners, and our developers to plan and develop solutions that are additive and responsible.<\/p>\r\n

An example of this is our partnership with Intersect Power and TPG Rise Climate, which will bring new generation capacity to the electric grid, co-locating with our load, rather than interconnecting new load and taking capacity away from the grid.<\/p>\r\n

Nathalia Valdes, Investor Relations:<\/strong> Could you walk us through how you're managing current and future grid and transmission bottlenecks?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy:<\/strong>  Sure. Yeah, one way I could do that is explain two of the exciting partnerships we announced this year to address this very issue. <\/p>\r\n

We are collaborating with CTC Global, this was announced in June, to help scale the use of high capacity, U.S. manufactured, advanced conductors. This is a proven technology that has been demonstrated to increase grid capacity and reliability at unparalleled speed. We're talking about a potential to double the transmission capacity in months versus years and about half the cost of conventional structural rebuild. So we've been working with CTC Global to identify high-impact transmission lines to unlock this grid capacity in the U.S. <\/p>\r\n

And in April, we announced that we're bringing together the power of Alphabet, including Tapestry, which is an X company, and Google Cloud and Google DeepMind to build and deliver a set of collaborative AI tools that will enable PJM, which is North America's largest regional transmission grid operator, to connect energy resources to the grid much faster. <\/p>\r\n

So Tapestry is building an AI powered tool to help streamline and accelerate the inner connection application of critical parts of the verification process that will allow new generation that is currently waiting to be interconnected to come online much, much faster. <\/p>\r\n

I think beyond these efforts, we, again, strongly support policy measures, at both the Federal and State levels, that can help unlock timely construction of regional and interregional transmission lines that we are going to need to meet this next wave of economic growth.<\/p>\r\n

Nathalia Valdes, Investor Relations: <\/strong>Thanks, Amanda. So many of the solutions that we've discussed focus on the supply side. Now, let's turn to the demand side. Investors asked: How is Alphabet leveraging demand-side management and load flexibility solutions? To what extent are we using those? And what are the primary barriers preventing wider adoption?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong> Yeah, we've been focusing on this for many years now, trying to figure out and working with our partners to bring flexible demand capabilities into our data center fleets. <\/p>\r\n

These capabilities are often referred to as demand response or demand flexibility, and they allow us to shift or reduce power demand to help relieve stress on the grid during peak demand or during grid emergencies. <\/p>\r\n

So for example, if there's a day in the middle of summer when everyone cranks on their air conditioning at the same time, and the grid becomes overloaded, we're exploring whether or not or how we can ramp down. Can we actually shift our loads to other times of day, or even in our network to other data centers, to ensure that neighbors have access to reliable power? <\/p>\r\n

It's really an important tool in our toolbox that offers faster, more cost efficient alternatives to building new power supply that's only being built to meet a few hours of the day or a few days of the year. But the amount that we can curtail, which is to reduce our power load, varies by data center location and also varies by the type of workloads being run in the data centers that they serve.<\/p>\r\n

Now we've been able to demonstrate this in a number of markets over the past few years. To date, Google has successfully driven demand side demonstrations with Omaha Public Power District, this is in Nebraska, where we reduced power demand during three grid emergencies in 2024. <\/p>\r\n

We also used our capability here during the European Energy Crisis in 2022 when prices hit historic highs, and we were able to offer reducing loads during times of high grid strain.<\/p>\r\n

We do this also in Taiwan, where we've been able to leverage this capability to help our grid operators maintain reliability during those periods of the year when demand on the grid is the highest.<\/p>\r\n

And building on that, this year, we progressed with two new utility agreements. One with Indiana Michigan Power and the second with Tennessee Valley Authority, and these agreements were aligned to reduce our power consumption associated with machine learning workloads when the grid is strained.<\/p>\r\n

Finally, in October, Google announced a $4 billion investment to build our first data center in Arkansas with Entergy. And here, we will also be implementing demand flexibility at the data center to support the growth and reduce power usage during peak times. <\/p>\r\n

So I'll just say, there's a lot of work being done in this regard and has already been done for a number of years to help us prepare to think about how we can be more flexible as a tool to help meet our power needs. <\/p>\r\n

Nathalia Valdes, Investor Relations:<\/strong> Let's talk now about energy efficiency and how you think about that in our data centers. What are some of the levers to improve energy efficiency?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy:  <\/strong>Yes, energy efficiency is a huge area of emphasis for Google. We've built efficiency across every layer of our AI systems, from custom hardware, to highly efficient models, to robust server systems that are the machines that make these models possible.<\/p>\r\n

Our data centers now deliver 6x more computing power per unit of electricity last year than they did just 5 years before. And I'm pleased to share that Google data centers last year used 84% less overhead energy than the industry average for functions like cooling and power distribution. This ensures that the highest amount of energy usage is really being used to drive compute, and we continue to innovate on how we can make our data centers more efficient.<\/p>\r\n

In August, for the first time, we shared data on energy, water, and carbon footprint per Gemini Apps prompts. And the findings demonstrated that Gemini's full-stack efficiency improvements, over a 12 month period, the energy footprint of a median text prompt dropped by 33x. To a level that is equivalent to watching TV for a little less than nine seconds.<\/p>\r\n

So these improvements really are a result of designing every element for maximum performance per watt. This includes our custom TPUs, our smarter models, and again, a lot of work is going into building highly efficient data centers. <\/p>\r\n

Nathalia Valdes, Investor Relations: <\/strong>The next question is about future solutions, an area of high investor interests. What are Alphabet's current priorities for enabling the development and scaling of future clean energy power technologies? And are there any that you're particularly excited about?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong> We're doing a lot in this space. We are actively implementing energy strategies that incorporates both established and cutting-edge technologies. This approach that we're using leverages proven technologies like solar, wind, hydro, power, and battery, while at the same time, we're driving research and development, as well as the deployment of advance energy solutions like enhanced geothermal, long duration energy storage, and as you've seen, advanced nuclear. <\/p>\r\n

I'll speak to nuclear for a second. When it comes to nuclear, we're working to really revitalize legacy nuclear infrastructure to unlock greater capacity for the system in the near term. An example of this is through our recently announced collaboration with NextEra Energy. And we worked with them in partnership to restart the Duane Arnold Energy Center in Iowa. <\/p>\r\n

Simultaneously, we are investing in advanced nuclear technologies that also have a long term potential for commercial scale. This includes our agreement with Kairos Power for a small modular reactor, or SMR, as well as our bet on fusion energy.<\/p>\r\n

So in June, we signed a large, direct corporate offtake agreement for fusion, which is, to date, the largest agreement with Commonwealth Fusion Systems to power our data centers in Virginia. <\/p>\r\n

As a source of clean-firm energy, we see nuclear as a rapidly growing and important piece of our energy portfolio to meet both short and long term needs as we move forward.<\/p>\r\n

Another technology that we're excited about is enhanced geothermal, which harnesses the heat within the earth's crust to create clean burn power. Geothermal has strong potential in many regions where we operate, including the U.S. and Asia Pacific and we are working to unlock it through a growing portfolio of partnerships and investment.<\/p>\r\n

While geothermal, as a technology, has been a long, established source of energy, by investing in enhanced geothermal, we can broaden the locations where we can access and tap into this clean and firm resource.<\/p>\r\n

In 2021, we signed our first corporate agreement to develop an enhanced geothermal project with our partners at Fervo Energy. This project is now operational. And in 2024, we expanded our partnership with them to build a larger, 115 megawatt project in Nevada. <\/p>\r\n

This April, we also signed a long term, partnership agreement with the geothermal developer Baseload Capital, which includes the first PPA, or corporate PPA, for geothermal power located in Taiwan. <\/p>\r\n

So while we're addressing the short term needs for a data center, it's really critical for us to continue to plant the seeds to meet the long-term needs for our power supply in the future. And that's exactly what we're doing when you see us making these advanced energy bets.<\/p>\r\n

We're confident that these partnerships and investments are going to really unlock greater supply in this decade, but also in the next decade. And we've already seen how we can start, for example, through Fervo Energy, from small demonstration projects to building them out at scale. We look to unlock these similar partnerships as we continue to invest in the future.<\/p>\r\n

Nathalia Valdes, Investor Relations:<\/strong> Amanda, you mentioned your collaboration with Kairos Power. Investors asked if this collaboration could bring scalable solutions? And if so, what is the timeline?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong> Yeah, in 2024, we began our long-term collaboration with Kairos Power, and we worked with them to unlock 500 megawatts of nuclear power for the U.S. electricity system by 2035 and we agreed to do this through multiple deployments of their small modular reactor.<\/p>\r\n

This year, in August, we were able to share the first deployment against this framework agreement in Oak Ridge, Tennessee. We see this as a promising and scalable solution. And again, we are making those investments now so that we can start to build out the pipeline and see scaled growth in future. <\/p>\r\n

It's by committing to this “order book” framework, where we purchase electricity from multiple reactors versus just one reactor at a time, that we're sending an important demand signal that's going to help jumpstart the supply chain required to build out this capacity to meet our long term needs.<\/p>\r\n

I will share that the U.S. Department of Energy said that repeated deployments of SMR designs will help to lower costs, and we believe that as well. It's going to be critical to making this technology commercially viable and widely available for everyone.<\/p>\r\n

Nathalia Valdes, Investor Relations: <\/strong>Thanks, Amanda. Could you share more details on the strategy to use natural gas, particularly with Carbon Capture and Storage? How do you reconcile the use of this power source with our long term carbon-free energy ambition?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy:  <\/strong>Yeah, when Google published our strategy to advance our next generation of clean electricity resources, this was in 2023 we identified a suite of technologies that we would work with to help commercialize, including advanced geothermal and advanced nuclear, which I just spoke about, in addition to long duration energy storage. But this paper also identified natural gas with carbon capture and storage as a critical source of clean burn power, and we outlined a stringent strategy and environmental criteria that we would use when we evaluate potential CCS projects.<\/p>\r\n

It's on the back of those standards that last month we announced our first-of-a-kind, 400 megawatt, gas plant in Decatur, Illinois that will capture and permanently store approximately 90% of CO2 emissions. This is the first project in a longer term collaboration with the developer, Low Carbon Infrastructure, LCI, a portfolio company of the leading infrastructure investor I Squared Capital. And we are working together to develop future CCS facilities in the U.S. to be able to demonstrate how we can deploy CCS projects for power generation, again, at commercial scale. <\/p>\r\n

We view this as a crucial step in de-risking a technology that leading global institutions have concluded is critical to achieve our goals of decarbonization.<\/p>\r\n

Incorporating natural gas-fired power generation with a high threshold for carbon capture really helps us, both grow reliable energy, as well as lower our emissions in the long term.<\/p>\r\n

Nathalia Valdes, Investor Relations:<\/strong>  Thanks, Amanda. So we’ve discussed the strategies for power sourcing, managing bottlenecks, and investing in next generation technologies. This last question ties all of these back to our ambitions. Given the rapid growth in energy consumption due to AI, how will Alphabet meet its climate ambitions? And what are the biggest challenges?<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong>Yeah, at Google, we like hard problems. We set our carbon-free energy at net-zero ambition. We were very clear that these are moonshots designed to push the boundaries and really unlock the breakthroughs that we need to see for innovations to meet these goals. And I'm going to acknowledge that achieving them has become much more complex and challenging. Our growing demand for digital services, including AI, really is putting pressure on the amount of power that we need.<\/p>\r\n

And external factors are creating new headwinds in this space, including slower than needed deployment of clean capacity. There's a number of policy uncertainties and regional challenges. <\/p>\r\n

But at the same time, we continue to make important progress in responding to ramping up our clean energy procurement of our energy portfolio. We have and continue to build a pipeline of new, clean energy projects that are additional and that we expect to help us stay ahead of the curve, even as our energy grows.<\/p>\r\n

We estimate that once operational, these new, clean energy projects that we are working to purchase power from, those that we signed just last year, could generate nearly 4x more electricity than the incremental load growth we experienced last year.  So this, coupled with significant strides in efficiency, is really helping to set us up for success. <\/p>\r\n

And one other data point on this, last year, despite our data center electricity consumption growing year-over-year, we were still able to reduce our data center energy emissions by 12%, and this was, in large part, due to all of the new, clean power we were able to bring online preparing for that growth.  And that successfully decoupling our operational growth from its associated carbon emissions. <\/p>\r\n

Nathalia Valdes, Investor Relations: <\/strong> Well, thank you so much, Amanda, for spending time with us today. We really appreciate it.<\/p>\r\n

Amanda Peterson Corio, Global Head Of Data Center Energy: <\/strong> Thank you for having me. <\/p>\r\n

Jim Friedland, Head of Investor Relations:  <\/strong>Thanks, Amanda. Thanks, Nathalia. That concludes our call for today. If anyone has any questions or feedback, please send us an email at investor-relations@abc.xyz. Thanks, everyone, again for joining us. And Joelle, if you could close out the call. Thanks. <\/p>","DocumentFileSize":"199 KB","DocumentFileType":"PDF","DocumentPath":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2025\/Nov\/20\/Data_Center_Energy_Strategy_Call_Transcript_2025.pdf","EventId":1026,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"00000000-0000-0000-0000-000000000000","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2025\/Alphabets-Data-Center-Energy-Strategy-Call--2025-8CMCLdf62b\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"00000000-0000-0000-0000-000000000000","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"","ReportYear":"","RevisionNumber":43805,"SeoName":"Alphabets-Data-Center-Energy-Strategy-Call--2025-8CMCLdf62b","TagsList":null,"TimeZone":"PT","Title":"Alphabet's Data Center Energy Strategy Call","WebCastLink":"","WorkflowId":"131d5d7a-aefe-495f-be58-8e0c9614f774","EndDate":"11\/20\/2025 09:30:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"11\/20\/2025 08:30:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"Q4 2025 Webcast Link","Type":"Document","Url":"https:\/\/www.youtube.com\/watch?v=mIK5-yi7a-c"},{"ContentFileWorkflowId":null,"DocumentType":"file","Extension":"PDF","Size":"304 KB","Title":"For a PDF version of the transcript, please click here","Type":"Document","Url":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/Feb\/04\/2025_Q4_Earnings_Transcript.pdf"}],"Body":"

This transcript is provided for the convenience of investors only, for a full recording please see the <\/em>Q4 2025 Earnings Call webcast<\/em><\/a>.<\/em><\/p>\n

Operator:<\/strong> Welcome, everyone. Thank you for standing by for the Alphabet Fourth Quarter 2025 Earnings Conference Call.<\/p>\n

At this time, all participants are in a listen-only mode. After the speaker presentations, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/p>\n

I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. <\/p>\n

Please go ahead.<\/p>\n

Jim Friedland, Head of Investor Relations: <\/strong>Thank you. Good afternoon, everyone, and welcome to Alphabet's Fourth Quarter 2025 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi.<\/p>\n

Now, I'll quickly cover the Safe Harbor.<\/p>\n

Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties.<\/p>\n

Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement.<\/p>\n

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>\n

Our comments will be on year-over-year comparisons unless we state otherwise.<\/p>\n

And now, I'll turn the call over to Sundar. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Jim. <\/p>\n

Hi, everyone. Thanks for joining us. It was a tremendous quarter for Alphabet. The launch of Gemini 3 was a major milestone and we have great momentum.<\/p>\n

Alphabet annual revenues exceeded $400 billion for the first time. This quarter, Search continued to accelerate with revenues growing 17%. YouTube’s annual revenues surpassed $60 billion across Ads and Subscriptions.<\/p>\n

Cloud significantly accelerated with revenues growing 48%, now on an annual run rate of over $70 billion. Backlog grew by 55% quarter-over-quarter to $240 billion, representing a wide breadth of customers, driven by demand for AI products.<\/p>\n

We have over 325 million paid subscriptions across consumer services, with strong adoption for Google One and YouTube Premium. In addition, we have sold more than 8 million paid seats of Gemini Enterprise, which we launched just four months ago.<\/p>\n

And our Gemini App now has over 750 million monthly active users. We’re also seeing significantly higher engagement per user, especially since the launch of Gemini 3 in December.<\/p>\n

Overall, we’re seeing our AI investments and infrastructure drive revenue and growth across the board. To meet customer demand and capitalize on the growing opportunities ahead of us, our 2026 CapEx investments are anticipated to be in the range of $175 billion to $185 billion.<\/p>\n

Today, I’ll provide an update on our AI progress and then share highlights from Search, Cloud, YouTube, and Waymo.<\/p>\n

First, AI progress across the full stack. <\/p>\n

Our unrivaled infrastructure serves as the bedrock of our AI stack. We have the industry’s widest variety of compute options. That includes GPUs from our partner NVIDIA, who announced at CES that we’ll be among the first to offer their latest Vera Rubin GPU platform. Plus, our own TPUs that we’ve been developing for a decade.<\/p>\n

In December, we announced our intent to acquire Intersect, which provides data center and energy infrastructure solutions.<\/p>\n

As we scale, we’re getting dramatically more efficient. We were able to lower Gemini serving unit costs by 78% over 2025 through model optimizations, efficiency and utilization improvements.<\/p>\n

Next, world-class AI research, including models and tooling.<\/p>\n

We offer the most extensive model portfolio in the world and lead across Text, Vision, and Image-to-Video LMArena leaderboards.<\/p>\n

Gemini 3 Pro drives the state of the art in reasoning and multimodal understanding. It has seen the fastest adoption of any model in our history. Since launch, Gemini 3 Pro has consistently processed 3x as many daily tokens on average as 2.5 Pro.<\/p>\n

Our latest model powers Google Antigravity, our new development platform where agents can autonomously plan and execute complex software tasks. It already has more than 1.5 million weekly active users after launching just over two months ago.<\/p>\n

Our first-party models, like Gemini, now process over 10 billion tokens per minute via direct API use by our customers, up from 7 billion last quarter.<\/p>\n

Third, bringing AI to our products and platforms.<\/p>\n

We’re shipping innovation at scale to bring helpful AI features to people everywhere.  In January alone, we have launched Personal Intelligence in AI Mode in Search and the Gemini App; introduced new AI features to Gmail and updated Veo; reimagined Chrome as an AI-first, agentic browser through features like Chrome Auto Browse; announced Project Genie, which lets users create and explore interactive worlds generated in real-time using Genie 3, our general-purpose world model. <\/p>\n

And we laid the groundwork for shopping in the AI era by introducing a new open standard for agentic commerce, the Universal Commerce Protocol, built alongside many retail industry leaders.<\/p>\n

Finally, from Android to Pixel, we're getting our best AI capabilities into people's hands. At CES, a range of partners, including Samsung, showcased how they're bringing Gemini to more devices, from XR to the living room and beyond.<\/p>\n

And to confirm the rumors, we'll be introducing our Pixel 10a to our best-ever rated Pixel 10 series very soon.<\/p>\n

Turning now to key highlights from the quarter, starting with Search. Search saw more usage in Q4 than ever before, as AI continues to drive an expansionary moment.<\/p>\n

We’ve executed with incredible speed. We shipped over 250 product launches within AI Mode and AI Overviews just last quarter.<\/p>\n

We’ve integrated Gemini 3 directly into AI Mode in Search. Now Search can better understand your query, dive deeper on the web, and generate interactive UI experiences.<\/p>\n

And last week, we upgraded AI Overviews to Gemini 3, giving users a best-in-class AI response at the top of the Search results page.<\/p>\n

We’ve also made the Search experience more cohesive, ensuring the transition from an AI Overview to a conversation in AI Mode is completely seamless.<\/p>\n

These new experiences are proving to be more helpful and are driving greater usage. <\/p>\n

A few highlights: first, once people start using these new experiences, they use them more. In the U.S., we saw daily AI Mode queries per user double since launch and AI Overviews continue to perform very well.<\/p>\n

Second, people are engaging in longer, more complex sessions. Queries in AI Mode are 3x longer than traditional searches. We are also seeing sessions become more conversational, with a significant portion of queries in AI Mode now leading to a follow-up question.<\/p>\n

Third, people are searching in new ways beyond text. Nearly one in six AI Mode queries are now non-text, using voice or images. And Circle to Search is now available on over 580 million Android devices.<\/p>\n

Next, Google Cloud.<\/p>\n

Our growth in revenue, operating margin and backlog highlights the strength of our entire portfolio.<\/p>\n

One, we are winning more new customers faster. We exited the year with double the new customer velocity compared to Q1.<\/p>\n

Two, we are also signing larger customer commitments. The number of deals in 2025 over $1 billion surpassed the previous three years combined.<\/p>\n

And three, we continue to deepen our relationships with existing customers, who are outpacing their initial commitments by over 30%.<\/p>\n

Nearly 75% of Google Cloud customers have used our vertically optimized AI, from chips, to models, to AI platforms, and enterprise AI agents which offer superior performance, quality, security, and cost-efficiency. These AI customers use 1.8x as many products as those who do not, enabling us to diversify our product portfolio, deepen customer relationships and accelerate revenue growth.<\/p>\n

Our product line has multiple monetization levers, spanning infrastructure, platform, and high-margin, AI-powered products and services with 14 product lines each exceeding $1 billion in annual revenue.<\/p>\n

We offer leading infrastructure for AI training and inference to our Cloud customers, with the industry’s widest variety of compute options: from our own seventh-generation Ironwood TPU to the latest NVIDIA GPUs. Our ten-year track record in building our own accelerators—with expertise in chips, systems, networking, and software—translates to leading power and performance efficiency for large-scale inference and training. <\/p>\n

Our Cloud AI accelerators serve the leading frontier AI labs, capital markets firms like Citadel Securities, enterprises like Mercedes-Benz, and governments for high-performance computing applications.<\/p>\n

We also offer our leading generative AI models, including Gemini, Imagen, Veo, Chirp, and Lyria to Cloud customers. In December alone, nearly 350 customers each processed more than 100 billion tokens. In Q4, revenue from products built on our generative AI models grew nearly 400% year-over-year, significantly accelerating from the prior quarter. Today, more than 120,000 enterprises use Gemini, including AI unicorns like Lovable and OpenEvidence, and global enterprises like Airbus and Honeywell. 95% of the top 20, and over 80% of the top hundred SaaS companies use Gemini, including Salesforce and Shopify. Gemini is becoming the AI engine for the world's most successful software companies.<\/p>\n

Leading enterprises are also driving strong demand for our enterprise AI agents. We have sold more than 8 million paid seats of Gemini Enterprise, our enterprise AI platform, to more than 2,800 companies, including BNY and Virgin Voyages, to streamline knowledge management and automate processes. Gemini Enterprise managed over five billion customer interactions in Q4, growing 65% year-over-year, for customers including Wendy’s, Kroger, and Woolworths Group. <\/p>\n

Our integration of Gemini in Google Workspace is driving wins with global brands like Schwarz Group and public sector organizations like the U.S. Department of Transportation.<\/p>\n

We are also seeing momentum with independent software vendors. Revenue from AI solutions built by our partners increased nearly 300% year-over-year, and commitments from our top 15 software partners grew more than 16x year-over-year.<\/p>\n

Before moving on, I’m pleased that we are collaborating with Apple as their preferred Cloud provider and to develop the next generation of Apple Foundation Models, based on Gemini technology.<\/p>\n

Up next, YouTube. I want to highlight four points.<\/p>\n

First, streaming. In the living room, YouTube continues to be the number one streamer in the U.S. for nearly three years, according to Nielsen. From the NFL to Coachella, YouTube is where people watch today's biggest popular culture moments unfold.<\/p>\n

Second, Subscriptions. We continue to see strong subscription revenue growth across YouTube, particularly YouTube Music Premium. We’ll soon launch new YouTube TV plans, bringing more choice and flexibility to subscribers with over ten genre-specific packages.<\/p>\n

And the NFL has seen strong NFL Sunday Ticket subscriber growth with YouTube, with the highest paid subscriber number ever in the history of the product.<\/p>\n

Third, podcasts. To illustrate YouTube’s popularity, in October 2025, viewers watched over 700 million hours of podcasts on Living Room devices, up 75% from just a year prior.<\/p>\n

And fourth, AI is transforming the YouTube experience for both creators and viewers. On average, every day in December, over 1 million channels used our new AI creation tools to supercharge their creativity. During that same month, more than 20 million viewers used our new Ask tool, powered by Gemini, to learn more about the content they watched.<\/p>\n

And finally, Waymo. This week, Waymo raised its largest investment round to date, and is well positioned to continue its momentum, with safety at the core.<\/p>\n

In December, we surpassed 20 million fully autonomous trips and are now providing more than 400,000 rides every week.<\/p>\n

Waymo continues to expand its service territory. Its sixth market, Miami, launched two weeks ago; and Waymo will soon expand its service to multiple cities across the U.S., and in the U.K., and Japan.<\/p>\n

The team has made incredible progress on important capabilities, including opening up public service to airports and freeways.<\/p>\n

In closing, 2025 was a fantastic year for the company. A big thanks to our employees and partners worldwide. We’re really well positioned going into 2026.<\/p>\n

Now, over to Philipp. <\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>Thanks, Sundar, and hello, everyone.<\/p>\n

I’ll cover performance for Google Services for the quarter, then structure the rest of my remarks around the great progress we are delivering across Search, YouTube and Partnerships.<\/p>\n

Google Services revenues were $96 billion for the quarter, up 14% year-on-year, primarily driven by accelerated growth in Search. Adding some further color to our results, the 17% increase in Search and Other was led by broad strength across all major verticals, with Retail particularly strong.<\/p>\n

On YouTube, the 9% growth in advertising revenues was driven by direct response.<\/p>\n

Network advertising revenues were down 2% year-on-year this quarter.<\/p>\n

Starting with Search and Other revenues, which delivered over $63 billion in revenue for the quarter. Sundar mentioned the expansionary moment for Search. The same is true for Ads. We are investing in AI to drive significant improvements across all areas of marketing. We're expanding the entire playing field that advertisers can compete on. AI gives businesses the ability to reach more customers in more places than ever before.<\/p>\n

Gemini uniquely positions us to bring the transformational benefits of AI to Ads in three critical areas for our customers: ads quality, advertiser tools and new AI user experiences. First, ads quality. We’ve been deploying Gemini models to improve query understanding at a rate of almost a launch per month for the last two years. These improvements drive better query matching, ranking and quality, making Search Ads even more effective.<\/p>\n

With Gemini across our Ads quality stack, we evaluate relevance with greater accuracy than with previous generations of models. This has significantly improved our ability to systematically deliver more helpful, high-quality ads, contributing to a meaningful reduction in irrelevant ads served.<\/p>\n

Gemini’s understanding of intent has increased our ability to deliver ads on longer, more complex searches that were previously challenging to monetize. Gemini models also have a significant impact on query understanding in non-English languages, expanding opportunities for businesses to scale globally.<\/p>\n

Second, we’re building more agentic actions into our advertiser tools. Businesses can now leverage Gemini in conversational experiences within Ads and Analytics Advisor to identify and run recommended actions, such as generating new campaigns. Advertisers use Gemini as a real-time partner to assemble creatives. In Q4 alone, they used Gemini to create nearly 70 million creative assets via text customization in AI Max and PMax.<\/p>\n

For instance, Aritzia, Canada’s premier fashion house, used AI Max to find new high-value customers that traditional strategies miss, delivering an 80% incremental uplift in conversion value for Q4.<\/p>\n

L’Oreal, one of the first alpha testers, used AI Max in 2025 across 800 unique campaigns in 23 countries and 30 brands. AI Max enabled the L’Oreal Group to maximize its presence across the full consumer journey, fuel its consumer growth and increase revenue for DTC brands, like NYX, by 23%.<\/p>\n

The third area is how we monetize new AI user experiences in Search. We have significantly increased our focus on AI Mode and are in the early stages of experimenting with AI Mode monetization, like testing ads below the AI response, with more underway.<\/p>\n

For example, we announced Direct Offers, a new Google Ads pilot, which will allow advertisers to show exclusive offers for shoppers who are ready to buy, directly in AI Mode. This new type of sponsored content uses AI to match the right offer provided by the retailer to the right user.<\/p>\n

As Sundar mentioned, we are building the era of agentic commerce and working with our partners to introduce the Universal Commerce Protocol in our consumer products and across the web. We've received tremendous feedback from the industry. Soon, people can use a new checkout experience to buy directly in AI Mode and Gemini from select merchants.<\/p>\n

Turning now to YouTube, which remains the number one streamer in the U.S. for nearly three years, according to Nielsen.<\/p>\n

YouTube creators are providing an unmatched breadth of content. Our investment in AI innovation across creativity, viewing experience and monetization continues to pay off.<\/p>\n

We’re seeing strong traction in our Subscriptions business, and are innovating to meet consumers where they are. We added a new sports tier for YouTube TV at a lower price point. YouTube Premium Lite is proving to be a popular choice. And we continue to deliver strong year-on-year growth across YouTube Subscriptions, particularly YouTube Music & Premium.<\/p>\n

Looking at monetization across YouTube, momentum continues in Shorts and the Living Room. Shorts now averages over 200 billion daily views; and, as we’ve shared before, in a number of countries Shorts earns more revenue per watch hour than traditional in-stream on YouTube, including the U.S.<\/p>\n

The Retail vertical continues to grow, fueled by smaller advertisers increasingly adopting Demand Gen. Likewise, direct response continues to benefit from the momentum we’re seeing with small and medium-sized advertisers.<\/p>\n

Viewers trust product and brand recommendations from YouTube creators, and we’re focused on making YouTube a premier shopping destination. Innovations, like shoppable ad formats, are improving advertiser return on investment.<\/p>\n

During Cyber 5, advertisers piloted shoppable mastheads, a new interactive ad format where viewers browse products and send links to their phones for an easy shopping experience.<\/p>\n

On Brands, our Creator Partnership Hub makes it easier for brands to find creators and develop campaigns. This holiday season, brands like JCPenney, Old Navy, and Target worked with creators for their holiday campaigns.<\/p>\n

Mattel partnered with eight top YouTube creators to reach families during the peak holiday shopping season in a campaign that helped drive a 25% increase in search volume for UNO.<\/p>\n

As always, I’ll wrap with the progress we’re seeing across Partnerships where our customers tap into the strength and breadth of Google’s products to accelerate their transformation.<\/p>\n

I would start by joining Sundar in how pleased I am that we are collaborating with Apple as their preferred Cloud provider and to develop the next generation of Apple Foundation Models, based on Gemini technology.<\/p>\n

We partnered with Reliance Jio to provide over 500 million consumers with an 18-month free trial of our Gemini suite of products and two terabytes of cloud storage. Reliance’s enterprise customers will also get access to Google Cloud’s Gemini Enterprise and TPUs, bringing the best of Google AI to every employee and workflow. <\/p>\n

The Home Depot is applying Google AI across the board, from Cloud tools to AI-powered ads and YouTube creator partnerships that connect with the next generation of do’ers. Their investments in PMax and YouTube Creator Partnerships have resulted in double-digit increase in ad clicks and visits.<\/p>\n

In closing, I'd like to thank Googlers everywhere for their contributions to our success and, as always, to our customers and partners for their continued trust.<\/p>\n

Anat, over to you. <\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thank you, Philipp.<\/p>\n

My comments will focus on year-over-year comparisons for the fourth quarter, unless I state otherwise. <\/p>\n

I will start with results at the Alphabet level, and will then cover segment results. I'll end with some commentary on our outlook for the first quarter and full year 2026.<\/p>\n

2025 was a strong year of innovation and execution for Alphabet. These efforts, combined with our investments in AI, drove meaningful results across the business. <\/p>\n

For the full-year 2025, Alphabet consolidated revenues were $403 billion, up 15% on a reported and constant currency basis.<\/p>\n

Moving to Q4 performance, we delivered strong growth in the fourth quarter. Consolidated revenues reached $113.8 billion, up 18%, or 17% in constant currency, and was driven by an acceleration in Search and Cloud revenues.<\/p>\n

Turning to costs and expenses, we reported a $2.1 billion stock-based compensation charge due to an increase in Waymo's valuation related to the investment round that was announced on Monday. The vast majority of the charge was reflected in R&D expenses.<\/p>\n

Total Cost of Revenue was $45.8 billion, up 13%. TAC was $16.6 billion, up 12%. Other Costs of Revenues was $29.2 billion, up 13%, with the increase primarily driven by depreciation associated with the deployment of our technical infrastructure, content acquisition costs largely for YouTube, and other technical infrastructure operations costs.<\/p>\n

Total operating expenses were up 29% to $32.1 billion. R&D expense increased by 42%, driven by compensation and depreciation. The increase in compensation was due to the Waymo charge and investment in AI talent.<\/p>\n

Sales and Marketing expenses were up 12%, primarily driven by marketing investments to support the Gemini App and Search.<\/p>\n

G&A expenses increased 21%, primarily due to a shift in timing of our charitable contributions.<\/p>\n

Operating income increased 16% to $35.9 billion, and operating margin was 31.6%. Both operating income and operating margin were negatively impacted by the $2.1 billion Waymo charge in the quarter.<\/p>\n

Other income and expenses was $3.2 billion, primarily due to unrealized gains in our non-marketable equity securities portfolio.<\/p>\n

Net income increased 30% to $34.5 billion, and earnings per share increased 31% to $2.82. <\/p>\n

We generated record operating cash flow of $52.4 billion in the fourth quarter, and $164.7 billion for the full year. This translated into $24.6 billion of free cashflow in the fourth quarter and $73.3 billion for the full year. We ended the quarter with $126.8 billion in cash and marketable securities, and $46.5 billion in long-term debts.<\/p>\n

Turning to segment results, Google Services revenues increased 14% to $95.5 billion, reflecting strong growth in Search and Subscriptions.<\/p>\n

Google Search and Other advertising revenues increased by 17% to $63.1 billion, representing another strong quarter with continued growth across all major verticals, with the largest contribution from Retail.<\/p>\n

YouTube advertising revenues increased 9% to $11.4 billion, driven by direct response advertising. Results were negatively affected from the lapping of the strong spend on U.S. election in the fourth quarter of 2024 that we've mentioned on previous earnings calls.<\/p>\n

Network advertising revenues of $7.8 billion were down 2%.<\/p>\n

Subscriptions, Platforms and Devices revenues increased 17% this quarter to $13.6 billion, due to strong growth in YouTube Subscriptions, particularly YouTube Music and Premium, and growth in Google One, which benefited from increased demand for AI plans. <\/p>\n

Google Services operating income increased 22% to $40.1 billion, and operating margins was 41.9%.<\/p>\n

The Google Cloud segment delivered outstanding results in the fourth quarter as the business continued to benefit from strong demand for our enterprise AI products.<\/p>\n

Cloud revenue accelerated meaningfully and was up 48% to $17.7 billion. Revenues were driven by strong performance in GCP, which continued to grow at a rate that was much higher than Cloud's overall revenue growth rate. As Sundar noted, we're driving performance through strong growth and a win rate of new customers, signing larger customer commitments, and increasing spend with existing customers.<\/p>\n

GCP's performance was driven by accelerating growth in enterprise AI products, which were generating billions in quarterly revenues. We had strong growth in both enterprise AI infrastructure driven by deployment of TPUs and GPUs, and enterprise AI solutions, which benefited from demand for our industry-leading models, including Gemini 3. <\/p>\n

Core GCP was also a meaningful contributor to growth due to strong demand for infrastructure and other services, such as cyber security and data analytics. We also had double-digit growth in Workspace, driven by an increase in average revenue per seat and the number of seats.<\/p>\n

Cloud operating income was $5.3 billion, more than doubling year-over-year. And operating margin increased from 17.5% in the fourth quarter of last year, to 30.1%.<\/p>\n

Google Cloud's backlog increased 55% sequentially and more than doubled year-over-year, reaching $240 billion at the end of the fourth quarter. The increase in backlog was driven by strong demand for our Cloud products, led by our enterprise AI offerings from multiple customers. <\/p>\n

In Other Bets, revenues were $370 million, and operating loss was $3.6 billion, reflecting the $2.1 billion Waymo charge I mentioned earlier. We allocate resources in Other Bets to businesses like Waymo, where we see meaningful opportunities to create value.<\/p>\n

Alphabet funded a significant portion of the $16 billion investment round that Waymo announced on Monday, which will allow the business to accelerate its global expansion. <\/p>\n

CapEx was $27.9 billion for the fourth quarter, and $91.4 billion for the full year, in line with our expectation. The vast majority of our CapEx was invested in technical infrastructure, with approximately 60% of that investment in servers and 40% in data centers and networking equipment.<\/p>\n

In Q4, we returned capital to shareholders through $5.5 billion of share repurchase and $2.5 billion of dividend payments.<\/p>\n

Turning to our outlook, I would like to provide some commentary on factors that will impact our business performance in the first quarter and full year 2026.<\/p>\n

First, in terms of revenues, we're pleased with the overall momentum of the business. At current spot rates, we would expect to see an FX tailwind toward consolidated revenues in Q1. However, the volatility in exchange rates could affect the impact of FX on Q1 revenues. <\/p>\n

In Google Services, we expect growth to be driven by ongoing innovation in the user experience, as well as improved ROI for advertisers, keeping in mind the normal seasonal pattern for advertising revenue.<\/p>\n

In Google Cloud, we're seeing significant demand for our products and services, which we expect to continue to drive strong growth, despite the tight supply environment we're operating in.<\/p>\n

Moving to investments, the investments we have been making in AI are already translating to strong performance across the business, as you've seen in our financial results. Our successful execution, coupled with strong performance, reinforces our conviction to make the investments required to further capitalize on the AI opportunity.<\/p>\n

For the full year 2026, we expect CapEx to be in the range of $175 billion to $185 billion, with investments ramping over the course of the year.<\/p>\n

We're investing in AI compute capacity to support frontier model development by Google DeepMind, ongoing efforts to improve the user experience, and drive higher advertiser ROI in Google Services, significant Cloud customer demand, as well as strategic investments in Other Bets.<\/p>\n

Keep in mind that the availability of supply, pricing of components, and timing of cash payments can cause some variability in the reported CapEx number.<\/p>\n

In terms of expenses, as we've discussed on previous calls, the significant increase in our investments in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expense and related data centers' operations costs such as energy. <\/p>\n

In 2025, depreciation increased by nearly $6 billion, or 38%, from $15.3 billion in 2024, to $21.1 billion in 2025. Given the increase in our CapEx investments in recent years, we expect the growth rate in 2026 depreciation to accelerate in Q1, and meaningfully increase for the full year.<\/p>\n

We're also planning to continue hiring in key investment areas, such as AI and Cloud.<\/p>\n

In 2025, our teams delivered amazing innovation, executing with a high level of discipline and velocity. These efforts provided great experiences for consumers and outstanding performance for creators, partners, and enterprise customers driving strong revenue growth.<\/p>\n

I'm going to take this opportunity to thank our employees for their contribution to this impressive performance.<\/p>\n

Now, Sundar, Philipp, and I will take your questions.  <\/p>\n

Operator: <\/strong>Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>\n

Your first question comes from Brian Nowak with Morgan Stanley. Your line is now open. <\/p>\n

Brian Nowak (Morgan Stanley): <\/strong>Thanks for taking my questions. I have two. One on agentic, one on YouTube. <\/p>\n

The first one on agentic, Sundar, I'd be curious to hear about, as you look back at 2025, where do you think you made the most progress on new types of agentic commerce products?<\/p>\n

And then looking into '26, where are you most optimistic for even more progress and utility for users and your advertisers?<\/p>\n

And the second one is on YouTube. We've seen a lot of the new content-creation models like Genie, et cetera. Walk us through the Alphabet long-term vision for how Genie and some of these content-creation tools could be integrated into YouTube over time.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Great. Thanks, Brian.<\/p>\n

First, maybe I'll take the agentic part first. <\/p>\n

You know, I definitely think '25 was more about laying the foundation, getting the models to start being more robust in agentic use cases. Obviously, coding is the area where the progress was the most felt. <\/p>\n

In the areas like commerce, I think we spent the year working with the ecosystem to develop the underlying protocol that's going to be needed for this agentic world. So I think the launch of Universal Commerce Protocol at NRF in January with a bunch of partners, founding partners, I think has been super well-received.<\/p>\n

So, I'm excited now that we have laid the foundation of interoperability on which agentic commerce can work. And now we are integrating those experiences into Gemini, AI Mode and so on. So I think this is the year where you will see consumers actually being able to use all of this, and I'm excited about the opportunity ahead.<\/p>\n

On YouTube, look, super excited by Genie. I'm blown away by -- I've spent a lot of time creating these incredible worlds. I think it's going to have a wide level of applicability. I think an area where we shine in general is multimodality and representing the real world, and I think Genie is a further step in that direction in terms of building world models.<\/p>\n

All the innovation we are doing, be it Imagen, Veo, Lyria, Genie, all that work we bring into our products and to our Cloud customers; and YouTube is going to be a natural place for creators. We are going to keep incorporating these tools. Already creators are responding by adopting these. But we do want to put creators at the center of the experience, and that's very, very important to us. And so it's, for us, making sure YouTube is a voice for creator expression as the foundation by which we will approach this. <\/p>\n

Brian Nowak (Morgan Stanley): <\/strong>Great. Thanks, Sundar. <\/p>\n

Operator: <\/strong>Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open. <\/p>\n

Eric Sheridan (Goldman Sachs): <\/strong>Thanks so much for taking the question. Two, if I could.<\/p>\n

Over the last couple of earnings calls, we talked a lot about imbalances between demand and capacity for AI, both internally and externally. With the step function change and absolute capital dollars you're projecting now in '26, can you talk about the pathway of closing the gaps for the need for compute, both internally and externally and how to think about some of the outputs of closing that gap as the year progresses? <\/p>\n

And again, the second part would be against that level of spend that you're now projecting toward '26, how do you think about continuing to find operating efficiencies inside the business to fund those growth investments as well? Thank you. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Eric. You know, you are right, and we've been supply-constrained, even as we've been ramping up our capacity. Obviously, our CapEx spend this year is an eye towards the future; and you have to keep in mind some of the time horizons are increasing in the supply chain, et cetera.<\/p>\n

So, we are constantly planning for the long-term and working towards that. And, obviously, how we close the gap this year is a function of what we have done in the prior years. And so there is that time delay to keep in mind.<\/p>\n

I expect the demand we are seeing across the board, across our services, what we need to invest for future work for Google DeepMind, as well as for Cloud, I think is exceptionally strong. And so I do expect to go through the year in a supply-constrained way.<\/p>\n

And maybe Anat can touch on the second part. <\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thanks, Eric, for the question. <\/p>\n

I've mentioned on one of the previous earnings calls our approach to how we look at efficiency and productivity, and we don't view this as an episodic one-time project or effort, but rather how we run the business on a regular basis, and always seek additional opportunities to drive efficiency across the business.<\/p>\n

And certainly, with the demand we're seeing, whether it's from external customers or across the organization, the more capital we can free up within the organization to invest, the better we can turn this flywheel of making investments to drive future growth. <\/p>\n

And we're doing this across the organization, whether it's within our technical infrastructure, certainly when we invest at these amounts, we look at how we can ensure that we are the most efficient with every dollar that goes towards our technical infrastructure. <\/p>\n

There are scientific innovations that are part of that process, technical innovation, as you know, and we've mentioned before, we primarily focus on construction of our own data centers. We do partner with some external parties on lease on occasion, but most of our data centers we can start ourselves, and we ensure that we do it in the most efficient way, in a way that matches our workloads and our needs.<\/p>\n

We look at coding productivity that Sundar mentioned in the past. About 50% of our codes are written by agents, coding agents, which are then reviewed by our own engineers. But certainly, it helps our engineers do more, move faster with the current footprint.<\/p>\n

We look at how we run the business across the organization. So using AI within the business to drive daily operations. It can be all the way from the engineering team to small teams within our back office. Even within my Finance team, for example, we deployed the agents within our treasury organization. We're deploying agents within how we run, how we pay and reconcile invoices, et cetera.<\/p>\n

So there are opportunities across the business that we evaluate on a regular basis to ensure we can free up more of that capacity to invest in our future. <\/p>\n

Operator: <\/strong>Your next question comes from Doug Anmuth with JP Morgan. Your line is now open. <\/p>\n

Douglas Anmuth (JP Morgan): <\/strong>Thanks for taking questions. I have two. Over the last couple years, we've seen considerable large language model leapfrogging, and many expect that to continue. What are the ways that Google can build and maintain its Gemini position around data and distribution and product integration? <\/p>\n

And then, how should we think about the potential for TPUs to move outside of Google Cloud and into external data centers and develop as an incremental revenue stream? Thank you. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Doug look, I think the LLM frontier, it's been an exciting trajectory, and I think 2026 will continue to show that progress. We're obviously improving these models across many paradigms, on pre-training, post-training, test time compute, and so on. And we are bringing multimodal models into the picture. We are bringing agentic capabilities, coding areas showing a lot of progress. And obviously, integrating all of this together and offering a great customer experience through our products, as well as through our APIs, to our Cloud customers. To me, feels like there's a lot of headroom ahead.<\/p>\n

And as you have seen our trajectory over the past two years, in terms of how we've been making progress, I think we are in a very, very relentless innovation cadence, and I think we are confident about maintaining that momentum as we go through '26.<\/p>\n

In terms of TPUs, I would think about it as it's reflected in our overall part of what makes Google Cloud an attractive choice is the wide choice of accelerators we bring to bear here, and we meet customers in terms of what their needs are, and the choice, as well as other things we bring as part of Google Cloud. <\/p>\n

The end-to-end efficiencies in our data centers, all of that comes to bear, and that's what you see in the strong momentum in Google Cloud. And given the overall investment we are making, we expect to be able to drive that momentum there. So that's how I would think about it. <\/p>\n

Douglas Anmuth (JP Morgan): <\/strong>Thank you, Sundar. <\/p>\n

Operator: <\/strong>Your next question comes from Mark Mahaney with Evercore. Your line is now open. <\/p>\n

Mark Mahaney (Evercore): <\/strong>Thanks. Two questions. One, could you just comment a little bit on the YouTube Ad revenue, that 9% year-over-year growth? It sounded like direct response was good, and it sounded like from Search that Retail came in relatively strong. So it's a little surprising that it didn't kind of come through in a YouTube Ads revenue growth.<\/p>\n

And then, Sundar, can I ask you to try to get ahead of a debate in the market, which is kind of -- there's maybe at a DeepSeek moment again. You talked earlier about Gemini being the AI engine for some of the most successful software SaaS companies out there in the world. And it just seems like there's a market belief that these software companies are kind of losing seat power, losing pricing power. And it looks like it would be a really terrible customer base. <\/p>\n

I can't imagine that that's actually going to happen, but could you just talk about it? You're at the forefront of AI and the impact that that's having on software companies. Why wouldn't that be -- or why would it be -- undermining the economics of your large software SaaS company base? Thanks. <\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>So, Mark, so, first of all, thank you for the question. <\/p>\n

For the full year 2025, YouTube's annual revenue surpassed $60 billion across Ads and Subscription. In Q4, YouTube Ads was driven, indeed, by strong growth in direct response. <\/p>\n

On the Brand side, as an ad share, the largest factor negatively impacting the year-over-year growth rate was lapping the strong spend on U.S. elections. We also saw a slight impact in some other brand-related verticals.<\/p>\n

But taking a step back, I think it's important to think about YouTube Ads and Subs holistically, because when a user shifts from being an Ads-supported user to a YouTube Music and Premium customer, it has a slightly negative impact on YouTube Ads revenues but a positive impact on our business. <\/p>\n

And we had strong revenue growth in YouTube Subscriptions this quarter, particularly in the YouTube Music and Premium category.<\/p>\n

Maybe the interesting part is what we're actually excited about, our growth momentum in brand, the opportunity on connected TVs, more innovative ad formats. For example, the shoppable mastheads I spoke about earlier that we piloted during Cyber 5. <\/p>\n

We're working really, really hard to further connect brands and creators, scaling sponsorships, and enabling advertisers to showcase their products, their services during high-visibility spotlight moments. <\/p>\n

We continue to expand the functionality of the Creator Partnership Hub, making it a lot easier for brands to actually find creators and develop campaigns. We are heavily focusing on brand deals, on measurement efforts. So, there's a lot of interesting work in the pipeline. <\/p>\n

And on top of that, we actually see opportunity also for upside with performance advertising. There's a lot of momentum with Demand Gen adoption across small and medium advertisers. <\/p>\n

We're also excited about the opportunity for continued Ads innovation and direct response, for example, shoppable formats, including in the living room, which is then helping drive strength in Retail, the continued momentum in Shorts, and so on. So overall, we are quite excited. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Great, and Mark, in terms of Gemini adoption and what this moment means for SaaS, et cetera, look, at least from my vantage point, I definitely see we have very, very good SaaS customers who are leaders in their respective categories.<\/p>\n

And what I see the successful companies doing is they are definitely incorporating Gemini deeply in critical workflows, be it on improving their product experience and driving growth, or using it to drive efficiency within their organizations. <\/p>\n

I think it is an enabling tool, just like it has been an enabling tool for us across our products and services, be it Search, YouTube, et cetera. I think the companies who are seizing the moment, I think, have the same opportunity ahead. <\/p>\n

And at least we are excited about the partnerships we have there and the momentum. If I look at it in terms of their tokens usage, et cetera, the growth has been very robust in Q4.<\/p>\n

Mark Mahaney (Evercore): <\/strong>Thank you. <\/p>\n

Operator: <\/strong>Your next question comes from Mark Shmulik with AllianceBernstein. Your line is now open. <\/p>\n

Mark Shmulik (Bernstein): <\/strong>Yes, thanks for taking my questions. Two, if I may. <\/p>\n

The first for Anat. Can you talk a little bit more about the relationship between investment levels and how you expect core performance to trend? Is there an operating income or free cash flow objective that you solve towards? How do you think about greenlighting resources and projects?<\/p>\n

And the second question is for all of you. A year ago, you probably could have guessed the answer to this question. But given where we are today, for each of you, what keeps you up at night here as you think about the Google story and what's next? Thanks. <\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thanks, Mark. Let me start with the question on the investment framework, and it's an important one and as you can imagine, an important one for us as well. <\/p>\n

We have a highly rigorous framework that we use internally where we look at all the needs for investment, whether it's from our own organization, or from external customers, and have an estimate of what that investment could potentially yield. Obviously, not just near-term but long-term as well. So we take that into consideration when we make the following decision.<\/p>\n

The first one is the total investment that we make across the company. This was, for example, in 2025, the $91 billion we invested in CapEx and our estimate for CapEx investment this year, so what's the total envelope that we want to invest to ensure that we can drive both near-term and long-term growth for the company. <\/p>\n

And then the second way we use that framework is to allocate these funds across the organization, determine where we should make these investments.<\/p>\n

And throughout the year, as you can imagine, we always look to understand where things are moving, whether it's the external dynamics or internal dynamics. And I've mentioned some of the supply chain pressures we're seeing externally. So we look at this with a highly rigorous framework to make sure that we're making the right decision.<\/p>\n

It was exciting to see the fact that we're already monetizing -- and you saw it in the results that we just issued this quarter -- the investments that we've made in AI. It's already delivering results across the business. <\/p>\n

I know within Cloud, it's very obvious external, but you've heard the comments on the success we're seeing in Search, the comments from Sundar and from Philipp; and then the frontier model development that really serves as the foundation for the organization.<\/p>\n

We then also look at just the cash flow, cash flow generation, the health of our financials and the balance sheet. That's important as well. So we take that into consideration when we make the decision about the overall level of investment. We want to make sure that we do it in a fiscally responsible way, and that we invest appropriately but we do it in a way that maintains a very healthy financial position for the organization. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Maybe I can answer on what keeps us up at night. <\/p>\n

Look, I think overall, we've been on this AI-first trajectory for over a decade now, and it's what we've been methodically thinking our way through. It's the reason why we have been working on TPUs for over a decade, as an example.<\/p>\n

But I think specifically at this moment, maybe the top question is definitely around compute capacity, all the constraints, be it power, land, supply chain constraints, how you ramp up to meet this extraordinary demand for this moment. Get our investments right for the long-term and do it all in a way that we are driving efficiencies and doing it in a world-class way.<\/p>\n

So that's where I think we are meeting the moment well, but it's definitely an area where we're spending a lot of time. <\/p>\n

Operator: <\/strong>The next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.<\/p>\n

Michael Nathanson (MoffettNathanson): <\/strong>Thanks. I have one for Sundar and one for Anat.<\/p>\n

Sundar, you mentioned Universal Commerce Protocol a bunch of times. I wonder if you could spend some time talking about the rationale for developing it, the opportunity that you see it solves for, and what it means for the product discovery funnel for consumers.<\/p>\n

And then for Anat, any color you can provide on a CapEx guide between longer-duration assets, like buildings and infrastructure, and shorter cycle assets, like technical and audio equipment, that would be helpful. Thanks. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Michael. Obviously, people go through a lot of commercial journeys across many of our surfaces:  Search, YouTube, Gemini App and so on. So I think as well as we support, through Cloud and Ads, our entire Retail partners as well.<\/p>\n

The opportunity to improve the experience, I think, can be kind of a huge foundational uplift here. But it's important that we are approaching it, keeping in mind that our users, as well as merchants here and figuring out that value. <\/p>\n

Part of what's been good in designing the Universal Commerce Protocol is it makes it much easier for users to complete transactions. But at the same time, it allows merchants to help showcase the range of their offerings, if they want to make promotions, et cetera. So all of that is built into the protocol.<\/p>\n

And I think you have to get that value prop for the ecosystem right to make the experience better.<\/p>\n

And so it's foundational. And more importantly, we are now implementing the protocols, and our Gemini models are making progress in those agentic capabilities.<\/p>\n

So, I'm excited about a future where, as people are going through discovery, searching, finding new things, if they're interested in acting upon it, all of that is seamless; and so it overall creates an expansionary moment. <\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>And the question with regard to the CapEx and what makes up the total that we've announced for this year and last year. <\/p>\n

Approximately 60% of our investment in 2025, and it's going to be fairly similar in 2026, went towards machines; so, the servers. And then 40% is what you would refer to as long duration assets, which is our data centers and networking equipment. <\/p>\n

I think you're probably referring to the depreciation delta between them, those long-term duration assets depreciate over -- the building could be 40 years or longer. Other components may be less than that.<\/p>\n

Another important component is how we allocate this CapEx, and we've commented in the past about the allocation of our ML compute across the business. And for 2026, just over half of our ML compute is expected to go towards the Cloud business. <\/p>\n

Michael Nathanson (MoffettNathanson): <\/strong>Thank you so much. <\/p>\n

Operator: <\/strong>Your next question comes from Ross Sandler with Barclays. Your line is now open. <\/p>\n

Ross Sandler (Barclays): <\/strong>Great, just a question on the native Gemini 750 million. So we added 100 million MAUs in the fourth quarter. Could you just talk high level about usage and retention of native Gemini? And is this 750 the right way to measure your progress against companies like ChatGPT, or is there another cohort of users that aren't in that 750 that maybe we should also consider? Thanks a lot. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Ross, I think we definitely saw, I would say, extraordinary creative growth in Q4 for Gemini App. It's not just a growth in monthly active users, but there was a sharp increase in engagement per user on the app.<\/p>\n

So all the metrics, be it active usage, the intensity of usage, retention, all showed distinct progress across iOS, web, Android, et cetera, and geographically globally. <\/p>\n

So definitely, all the product experience improvements, the work we did with Nano Banana, the progress with the Gemini models, all translated into strong momentum, and the momentum is continuing. So we are excited about that and will continue to invest.<\/p>\n

Obviously, there are many people who are getting a deeply AI-native experience in the context of AI Mode and Search as well, and we are definitely seeing strong growth and progress. And the introduction of Gemini 3 in AI Mode was a very positive driver as well.<\/p>\n

Obviously, we'll continue to evolve these experiences, and I'm excited about the opportunities there. <\/p>\n

Ross Sandler (Barclays): <\/strong>Thank you. <\/p>\n

Operator: <\/strong>Your next question comes from Ken Gawrelski with Wells Fargo. Your line is now open. <\/p>\n

Ken Gawrelski (Wells Fargo): <\/strong>Thank you very much. Two, if I may, both on Search.<\/p>\n

First, could you walk us through how you're evolving your views on the monetization of AI search activity? Given the more conversational nature and longer periods of engagement per session, consumer utility increasingly is driven by the on-platform results, not specifically the link-outs and referrals. In that construct, how do you think about increasing the revenue opportunity to match the consumer utility? Is this increasingly where premium subscriptions play?<\/p>\n

And then, question two, and it's related, as you think about partnerships such as the new Apple partnership on Siri, how do you think about the right way to align for success with those partners? Previously, as disclosed in the DOJ documents, et cetera, it was a revenue share relationship. But now, if you think about the utility that you're driving through AI search and through Gemini on those platforms, it may be less related to the actual quote-unquote Search revenue. Could you just talk about how you align with partners for success there? Thank you. <\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>So first of all, it might be worthwhile to say that the acceleration we saw in Search was not due to a single driver, but was really the result of many different parts of our business showing strength and working well together. And maybe I’ll quickly add the vertical perspective: Retail, Finance, Health drove actually the greatest contribution to Search revenue. Nearly every major vertical actually accelerated in Q4.<\/p>\n

More specifically to your question, the ongoing innovation, as you know, core to what we do and the enhancements to the user and the advertiser experience, really continue to drive our performance and make hundreds of these changes every quarter. <\/p>\n

We see AI Overviews and AI Mode continue to drive greater Search usage and growth in overall queries, including important and commercial queries. Gemini-based improvements in Search Ads help us better match queries and craft creatives for advertisers. <\/p>\n

I talked about the understanding of intent and how this has significantly expanded our ability to deliver Ads on longer and more complex searches that were, frankly, previously difficult to monetize. AI Max, for example, is already used by hundreds of thousands of advertisers and continues to unlock billions of net new queries in that sense.<\/p>\n

We see strength with SMB advertisers expanding their budgets and adopting automation tools leading to better ROI. On the creative side, we're using Gemini to generate millions of creative assets via text customization in AI Max and PMax and so on. So we're very pleased with what we're seeing here. <\/p>\n

Operator: <\/strong>And our last question comes from Justin Post with Bank of America. Your line is now open. <\/p>\n

Justin Post (Bank of America): <\/strong>Great. Just wanted to follow up on the Gemini App. Obviously, great growth there. Are you seeing any cannibalization of Search, as far as activity as people start using that app more?<\/p>\n

And then second, on monetization, where are you on that? And with agentic and other Ads coming, could that be incremental to your growth over the next few years? Thank you. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Right now, overall, I think we are giving people choice. People are obviously using Search, experiencing AI Overviews and AI Mode as part of it, and Gemini App as well. The combination of all of that, I think, creates an expansionary moment. I think it's expanding the type of queries people do with Google overall. So overall, some of it is what we see as a growth opportunity, and we haven't seen any evidence of cannibalization there.<\/p>\n

And maybe Philipp can comment on the monetization. <\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>I think Sundar previously commented on agentic and how we think about it. Look, in general, as with all of our products, we really focus first and foremost on creating a great user experience, and we're very excited about where we are with the Ads and AI Overviews and early experiments in AI Mode, including innovations like direct offers and our roadmap for the future. <\/p>\n

In terms of the Gemini App, today, we are focused on the free tier and subscriptions and seeing great growth, as Sundar discussed. But Ads have always been part of scaling products to reach billions of people, and if done well, Ads can be really valuable and  helpful commercial information, and at the right moment, we'll share any plans. As we've said, we're not rushing anything here. <\/p>\n

Operator: <\/strong>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. <\/p>\n

Jim Friedland, Head of Investor Relations: <\/strong>Thanks, everyone, for joining us today. We look forward to speaking with you again on our First Quarter 2026 call. Thank you, and have a good evening. <\/p>\n

Operator: <\/strong>Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect. <\/p>\n

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This preliminary transcript is provided for the convenience of investors only, for a full recording please see the Morgan Stanley Technology, Media and Telecom Conference conference <\/em>webcast<\/em><\/a> <\/em><\/p>\n

Brian Nowak (Morgan Stanley):<\/strong> All right. Good afternoon, everyone. We're thrilled for our next fireside chat to have Anat Ashkenazi with us from Alphabet. Thank you so much for joining us. 

Anat Ashkenazi, CFO, Google:<\/strong> Thank you for having us here today. And for everyone who's joining today to listen to the Alphabet story.

Brian Nowak (Morgan Stanley):<\/strong> Always good to see you, to catch up on everything going on at Alphabet and around the world. A lot has changed in a year, which we will get to. In perception at least. But first, the disclosures. Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com\/researchdisclosures. They are also available at the registration desk.

Some of the statements made today by Ms. Ashkenazi may be considered forward looking. These statements involve a number of risks and uncertainties that can cause actual results to differ materially. Please refer to Alphabet's forms 10-K or 10-Q including the risk factors discussed in any of these filings. Any forward-looking statements made today are based on assumptions as of today and Alphabet undertakes no obligation to update them.

With that, there is a lot going on with the company. So, let's sort of take a step back. One year ago we were sitting here. Alphabet was about a $2 trillion company. The discussions in the hallways and just in general on Wall Street were around search disruption, long-term positioning versus new search entrants, how to think about the business' growth. Now it's almost a $4 trillion company. So it seems investor sentiment has changed.

From your perspective, what has changed internally at Alphabet with how you think about pace of productization, the long-term vision? How do you think about what changed internally now versus one year ago?

Anat Ashkenazi, CFO, Google:<\/strong> Great question and a way to start. So if you think about where we were a year ago versus where we are today or maybe where we were ten years ago, the core strategy hasn't really changed. And it's a company that is focused on user first, consumer first, innovation based. And then looking at being an AI-first company. And that has been the strategy for many, many years.

It started with the acquisition of GDM and Sundar making statements about being an AI-first company. That strategy has really led us to where we are today. If the strategy hasn't changed, then it is the execution or is it the pace of strategy and how we're thinking about the business?

So within that strategy, we have been talking about having the full stack approach. Within our full stack, we call it technical infrastructure sometimes in the company which is the chips that we have. And we have our own TPUs. We launched our first TPU just over a decade ago in 2015. Now we're on generation seven, access to GPUs from NVIDIA as well as a set of data centers, which we mostly build ourselves but we also lease data centers. Networking equipment that is, I believe, the largest most comprehensive one in the world.

That's our technical infrastructure. And then that combined with, when I said we're an innovation-based company, world-class research capabilities. Which you see through our Google DeepMind efforts, our frontier models, the research efforts that we have across the company. And then coupled with the ability to distribute and access consumers, enterprises, creators around the world with the set of products we have. So that kind of anchors our strategy.

And what we've done since deciding that we're an AI-first company, is invested very strategically in building that AI infrastructure across the organization. And now it's really the foundation across the Alphabet business. Whether it's in Search or in YouTube or Platforms & Subscription business or in Cloud. And certainly Gemini, Google DeepMind as well as the other bets whether it's Waymo or Isomorphic, etc. It's really the research foundation that sits across the company.

What you've seen in the past year is the strategy delivering. And delivering at a rapid pace of innovation. So we are now turning the flywheel, this innovation flywheel very fast and delivering innovation to consumers, enterprisers, creators much faster than we had in the past. But we had the privilege of working on this for years and creating these products.

And when we deliver those to consumers, then we're able to see how those are used and where we can drive continued improvements, so we can deliver the next wave of innovation. So that is what is the underlying of where we are today and what got us here and what will take us to the next decade and beyond.

Brian Nowak (Morgan Stanley):<\/strong> Going forward. The flywheels are spinning faster. But so is the investment. So I have to ask you about -- as a CFO and you're doing math around ROIC, so last year CapEx was around $90 billion. This year the guidance is around $180 billion of CapEx.

What types of analyses are you and the team doing to sort of evaluate ROIC on that CapEx just to ensure that you're getting enough revenue in a reasonable amount of time to generate return for your investors?

Anat Ashkenazi, CFO, Google:<\/strong> As you can imagine, I spend quite a lot of time on this question and on the CapEx investments in general in terms of how much we need to invest, how much are we investing, and what are we seeing as a result of that?

We have a highly rigorous framework that we use to make these decisions. The first decision is how much do you need to invest? $91 (billion) or this year we said $175 to $185 (billion). And that question we don't take lightly. And we start with aggregation of understanding demand across the business whether it's internal demand or external from customers like Cloud customers.

And from there we build on what do we need from a compute perspective? How do we cost it, which yields the numbers we've shared for this year. And we drive significant efficiency even within that technical infrastructure. Because we have the benefit of owning that full stack for the most part, we have experts who focus just on that, making sure that we construct our data centers in the most efficient way that's tailored to our workload or to what the customers need. Our TPUs, consistently looking at efficiency of the TPUs in terms of delivering more and more compute.

So we do this across the board. And when we get that demand, we then ask: What is that going to yield? If I'm investing in compute for Search or for Cloud or Waymo, what do I expect to get for that investment? And I look at this on a continuum. Some are more near term and it's more certain. And some are maybe long-term earlier innovation, if you think about some of the experiments, maybe Waymo five, ten years ago. Now it's delivering, obviously, but some of these experiments are early stages.

And then underneath that, the foundational layer of Gemini and the frontier models, they're supporting the entire company. So we look at, for example, if we're investing X in Cloud and I think I've shared on the call that approximately half or just over half of our ML compute this year is going to go to Cloud.

What are we expecting in terms of return? Is it external? What are the -- what's the profitability numbers? So there are financial metrics, there are operational metrics as well. We do this across the business to estimate what that looks like. And then we track it. And we track it on a very frequent basis. Just to understand, have we invested enough in an area or are we seeing more demand and we need to start reallocating or make different decisions?

And the team that looks at efficiency, can we get more and more out of every chip we have in our data center. A lot of thought and rigor goes into this which shouldn't surprise anyone given these amounts.

Brian Nowak (Morgan Stanley):<\/strong> Yeah. The continuous nature of it, I'm sure must play a role. Anything you could tell us about what surprised you over the course of last year? Just sort of adjusted CapEx or areas of more signal or less signal?

Anat Ashkenazi, CFO, Google:<\/strong> Yes, so last year we gave guidance that was lower than where we ended up. We ended up at $91 billion. We gave guidance around $75 billion. So we ended the year with higher CapEx. And there are a few drivers that can cause us to be higher or lower than the amount. One is, construction of the data center would be a great example.

So last year I shared that approximately 60% of our technical infrastructure investment went towards chips and about 40% to data centers and networking equipment. If we're able to accelerate construction, we may be able to pull in some investments. And that's a good thing. Because we have such high demand for our products, that the more we can bring in, the more revenue we can generate.

I've now said multiple quarters in a row we exited the quarter with more demand for our Cloud services than we had supply. So we certainly want to invest to be able to support the customer demand. That would be one example of something coming in. Or chips. As we acquire chips, we can get that earlier.

Now, this can also be the exact opposite. You may see construction delays. Or something is delivered on a later schedule, so it comes in later. So those could just move the same amount over between years.

The other thing is we are seeing greater demand than we had anticipated at the beginning of the year and we're trying to invest more. It is obviously challenging. There's a limit to what you can do in a year for that same year just given the time frame. If you need to construct data centers, it's not an overnight type of thing. There is an order of components. Those are the things that can move it up and down and we'll monitor for this year.

We are actively managing it for this year as well and probably provide updates on the quarterly calls on where we are.

Brian Nowak (Morgan Stanley):<\/strong> Great. There's a lot of sources of that demand between Search and YouTube and Cloud I want to get into. The first is on the cost discipline side. If we think about the CapEx, the amount of D&A that's going to flow through, could you give examples of still existing work streams you have in place to sort of manage the other costs just to potentially put a higher floor on EPS given all the D&A coming through?

Anat Ashkenazi, CFO, Google:<\/strong> So let me start with the approach. There's a philosophy I have with regard to cost management. And while people may refer to a work stream or an intervention or project, I view this differently. You always have work stream and always have projects and efforts. It's a non-stop effort. It's not that we're getting to a place where we said now we're at the most efficient. I always say it's like an Olympic athlete. You never stop training. You always want to beat your own record.

And it's the same thing within a company. You always look to do a little more and drive more efficiency in the organization. And some of these things are the traditional things of just running the business more efficiently. Some are more scientific and innovation -- technical innovation.

So the technical spec I just mentioned or the CapEx of $175 billion to $185 billion which the majority of that is technical infrastructure. There's some building and some Waymo, etc but the vast majority is technical infrastructure. When you have such a large amount, it's how can we ensure that every dollar we put behind a data center or component or we're putting a chip in is the most efficient?

And it's not just the acquisition cost. But it's the utilization of the data centers and our technical infrastructure costs across the enterprise. It's an asset. When we have a data center with chips installed, it's an asset. We want to make sure we use that as much as we can. Whether it's using something 24\/7 or because we have within Alphabet, we use predominantly TPUs internally, moving that capacity to where it's needed. That fungibility is incredibly important.

So we look at that as how do we drive efficiency running a really good supply chain so that when you have the data center built out, you have the chips installed. So we don't have inventory sitting in a warehouse waiting for months for a data center to be complete. And vice versa. You want to try to match them as closely as possible. So that's on the technical infrastructure side. And certainly model efficiencies help as well. <\/p>\n

Then across the organization, you've seen some things we've done over the past 18, 24 months. Reduction in management layers driving efficiency in how we run the business. We introduced for the first time a volunteer exit program last year. Across the organization we have -- we believe we have a tremendous opportunity ahead of us and we want those excited about it staying and those that maybe want to do something else, they can make some choices. We're also looking at using AI internally. So while everyone I'm sure here is using some AI tools during your day, we encourage our own employees to leverage the AI tools we have. And in some cases, design AI tools for certain functional activities. So we've shared on the call the percent of code that's generated by AI. And then our engineers validate or test it. But we have it across the organization. <\/p>\n

I'll just give an example from my small team of Finance where there are tremendous opportunities. We now have a Treasury Agent. And the Treasury Agent goes across our balances of the cash we have on hand, to maximize the return on that investment. And it's yielding real financial results. And we have the benefit of having a Cloud business that allows us to co-develop these tools with Cloud or leverage the tools that our Cloud business has. Having an AI-first organization as well, is one of the areas that's going to drive continued efficiency.

But you're right. With investments of $91 billion last year and just over $50 billion the year before, there's going to be significant depreciation that's going to run through the income statement. Coupled with additional costs of energy. Last year we had about $21 billion in depreciation, the year before it was about $15 billion. That's not a small number to offset. We were able to hold and (see) some extension in our operating margins. That's hard to do. And that number is only going to grow next year just given what we've done historically. So we need to have these efforts in place on a regular basis so that we can have more money to reinvest in the business, to turn this flywheel faster. Some of it may flow to the bottom line. Some may be reinvested in highest priority areas.

Brian Nowak (Morgan Stanley):<\/strong> Well, the best way to trump the ramping D&A is faster revenue growth. Let's talk about revenue a little bit. Scale does help. And so does accelerating growth. So let's talk about Search. You've made a lot of changes to Search over the last 12 to 24 months. My team and I, we track all these: AI Mode, Overviews, Multimodal Search, Search Lens, Agentic capabilities have now started to emerge throughout it.

Is there any way you can help us if you think about maybe one or two of the changes you've made, that really drove larger than expected benefits to engagement and monetization than maybe what you would have had a year and a half ago.

Anat Ashkenazi, CFO, Google:<\/strong> We always start with an estimate of what this would look like. You hope to beat those expectations. One fun example would be Nano Banana that we launched within the Gemini App. If you're not familiar with this, our image generating tool went viral. Within, I want to say two weeks, we had 20 million new Gemini [users]. I mean, it's quite impressive if you think about just one tool and what it does so quickly. 

So this can happen with different launches. We were incredibly pleased with AI Overview and AI Mode as you said, has changed how people searched. And it's not just you get an AI Overview answer which is great. Obviously the summary's at the top. But the people learned they can ask questions differently or ask questions they've never been able to ask before, or never thought they'd be able to ask before. And what we're seeing is longer queries now in AI Mode and AI Overview. People are digging in, they're interacting more. It is driving growth in a number of queries. As well as commercial queries. Then as you've said, different ways of searching. So while we were used to typing something in, now you can actually point your phone or your camera at something and use Google Lens.

And it's a high-growth kind of feature for us. And you see the younger users are using that more. It's a brilliant tool for when you look to shop for something. You immediately point -- I want this flower and you point to it, you immediately get the different websites that can offer it. So we have invested in innovating what was core to Google's growth for several decades now.

And that's the -- as I said, our strategy is focus on the consumer innovation-based organization. You have to out-innovate yourself. Disrupt your own business model in the sense of, we had a great Search product which everyone loved and broadly used. Billions of people around the world.  And we brought new innovation into that, with AI Overviews, AI Mode, Lens - different ways of searching. And we're always thinking about what is the next frontier, what's the next way of -- what's the next thing we're going to be introducing.

Brian Nowak (Morgan Stanley):<\/strong> Well, maybe that next frontier could be agentic. We've written quite a bit about agentic and how to think about new types of Search could change e-commerce, travel, a lot of these categories. Sundar's talked about agentic. How do you think about the incremental utility for your Search users, or user base, as you roll out new types of agentic capabilities? What are the biggest technological hurdles you have to clear to really scale, quote unquote, agentic?

Anat Ashkenazi, CFO, Google:<\/strong> So agentic commerce I would say, still early days. But no doubt holds an interesting promise. If you think about how we interact with shopping today online, there are digital interactions but they're fairly simple. What we're looking at is taking this to a level where you can conduct much more complex processes all the way from searching through recommendations and then an actual purchase.

One of the complexities is the fact that there are so many sellers and so many brands out there and you need a unified way to connect them to the agent. So we've developed what we call UCP, this universal protocol that allows them to connect in a consistent way with this agent. And we're now -- we have a few customers on this. So if you go into your web browser and you type in: I want a silk pillow, whatever it is. It will show up the results and you can actually -- there are a couple of them where you can immediately click on a \"buy\" button, you put your credit card, and can immediately purchase through that. Early days, but there's certainly interesting opportunities when you think about truly making this seamless for a consumer that goes online and wants to shop for something and you get everything in one place.

I had my own things that I really, really want to see there. Already told our team this would be great for me personally. I'm not going to share just yet. Maybe in the future. But there's some cool opportunities there for users.

Brian Nowak (Morgan Stanley):<\/strong> I've used Gemini Agent to search for items for me on repeat. Trying to find golf pants of a certain size I can't find. It emails me alerts. Is that the type of thing you're thinking about? Sort of real-time Search, real-time price comparison? An actual interactive personalized shopper?

Anat Ashkenazi, CFO, Google:<\/strong> You can think about this as we talk about personalization, linking to what you're looking for. And it may be a preference. Or it may be criteria that you've provided ahead of time so that you have that personal shopper shop for you. But again, early days. Let's see what we share here.

Brian Nowak (Morgan Stanley):<\/strong> Socks for TMT next year through an agent. You have all these products, you have multiple different monetization nodes. And I feel like the discussion around subscription is more pronounced now than a couple years ago. But it's also observable that you are shipping more Gemini-based products to the free users faster than you were.

So philosophically, how are you making the decision on what stays behind the subscription paywall to drive that revenue stream as opposed to driving broader scaled option to the free user base?

Anat Ashkenazi, CFO, Google:<\/strong> So we have multiple tiers. We have a free tier and then we have several paid tiers. Each tier has slightly different offerings. As you get to the higher tiers you just have access to more tools. And different users have different needs of what they need to do.

If you go back to the strategy just mentioned, and the user is at the heart of our strategy, that means that we want to make sure we have the best user experience out there. And when you launch something that's free first, you get a lot of feedback and you see how the consumer is using that product.

But then also offering different tiers to users who may want to engage more and maybe they want something for a business activity as opposed to just a personal use. We make sure we have a variety of options. It's something we've always done and continue to always evaluate what's free versus paid and at what level.

We also want to make sure our tools are accessible. To consumers not just sitting here in this room but across the globe. So we have different pricing in different countries to ensure that consumers in those countries can access our product as well.

Brian Nowak (Morgan Stanley):<\/strong> Understood. One of the other big sources of demand for your compute has been Google Cloud. What a difference a year makes in this business. So this is now a business growing almost 50%, a backlog of over $240 billion. Our model has Google Cloud getting to be almost 40% of EBIT in a few years. This is a much larger business than it was.  Can you unpack some of the drivers over the last 12 months that have really driven this revenue acceleration and this strong backlog that we were all wrong about in missing one year ago?

Anat Ashkenazi, CFO, Google:<\/strong> So Google Cloud has had really record results throughout the last year. And as you said, exited Q4 at $17 billion in revenue. Annualizing a very large business already. And growing at 48% with a significant backlog. So what are the drivers of that growth? When I talked about AI -- we're an AI-first company across the organization, that's true for Cloud as well.

And if you think about Cloud, we have the GCP product whether it's the AI infrastructure where we have TPUs or GPUs or AI services we provide to customers. As well as our GCP core product such as security or data analytics where Google Cloud is known for and people come for. And then we have Workspace and some other smaller areas. And just our GCP area which I think I've shared on the call, that growth rate was actually higher than 48%.

So we're seeing AI drive the growth within Cloud. So that's if you think about the vertical in terms of what drives that. Now, who are the customers? Because I always get that question. Is it one customer? Two customers within the backlog? Should we be worried? And I always look at are these new customers or existing customers? The scale and size of these customers.

And what we're seeing which I believe is very positive is, existing customers expand their work with us. So they're pleased with the results they're seeing. They're getting the same benefits we're talking about with an AI-first company, they're getting the benefits of being an AI-first company for that organization. So they're expanding the work with us.

And the new customers coming in and wanting to get on Google Cloud or get access to our product, services or infrastructure. So that's very encouraging to see that. And we see it across small AI Labs, small companies to some of the largest enterprises. Having that diversity within our customer base is encouraging. But it's AI that's driving that growth. And Google Cloud as you've seen in the margins as you've just mentioned has executed incredibly well in delivering margin extension exiting at 30% operating margin with this 48% top-line growth. It's very impressive.

And they've been laser focused. Thomas does an excellent job making sure, we talked about efficiency not being a one time or episodic thing, but rather continuously how you think about the business. That's how he runs the business. He’s making sure every dollar that's invested is the most efficient one. And win more customers -- we're seeing the new customer win rate going up as well. It's exciting across the Cloud organization.

Brian Nowak (Morgan Stanley):<\/strong> Yeah, the type of growth and then the 55% incremental EBIT margins is impressive. Is there anything other than scale or anything you'd call out that you'd call out on that profitability that we should be mindful of that would question the durability of that?

Anat Ashkenazi, CFO, Google:<\/strong> Scale does help a lot. Obviously the top line has significantly expanded. And they are also faced with what you mentioned earlier which is the headwind associated with the depreciation, right? Because a lot of the depreciation would fit in the Cloud segment. And they've worked really hard on every line item that you see and think about within the P&L, middle of the income statement to make sure it's done in the most efficient way.  The same thing we do about the organization, they're doing that in Cloud. Certainly the top-line expansion scale does help.

Brian Nowak (Morgan Stanley):<\/strong> Let's talk about TPUs a little bit. There's a lot written including by us about the go-to-market strategy on TPUs, how to think about where it is and where it could go. Even I think there's something in the media last week about potentially setting up essentially TPU neoclouds to sort of sell those TPUs to third parties. Maybe just philosophically, could you talk to us about Alphabet's strategy on how it prefers to sell TPUs whether it's tethered to GCP workloads or on a standalone basis.

Anat Ashkenazi, CFO, Google:<\/strong> Our TPUs, which we launched the first one just over a decade ago, now in our seventh generation, we use it across the organization. So think about Gemini. Gemini was trained on TPUs. And that's a benefit that we have, because they're customized to our workload. As we think about the external customer base, we offer them both GPUs and TPUs so they have the choice based on the specific needs or preferences. They can access those, the TPUs and GPUs.

And the customers lead from that perspective. So based on what the customer demand is, whether it's TPUs and how we engage on that transaction is what will decide how we're thinking about this, as well as going back to our second or third question about ROIC, how do we allocate that compute, does it go to Cloud or internal purposes? Does it go to an external customer? All those are part of that equation of making that decision.

Brian Nowak (Morgan Stanley):<\/strong> Okay. Let's talk about YouTube a little bit. YouTube... About 2 billion daily active users. Our numbers show 80 minutes per user per day. You have a very big corpus of users with a lot of engagement. And yet this is an ad business for whatever reason we continue to get wrong. It continues to grow slower than we expect. It doesn't seem we're seeing as much GenAI uptick at YouTube as we are at other big scale social media platforms.

Is there anything different with the way YouTube's ad business is sort of being run than maybe other scaled engagement-based platforms?

Anat Ashkenazi, CFO, Google:<\/strong> YouTube is different. It's not a social media platform, right? It has much more than that. And as you think about YouTube, has an ad component to it and a subscription component to it. And we shared on the last call the combined revenue profile and the fact it has grown from the last time we've shared it. And that combined revenue profile is just over $60 billion.

When a consumer is on our platform, they can be an ad-supported consumer or they can be a subscription consumer. A subscription consumer, more profitable than an ad-supported one. So we look holistically at that across Ads and across Subscription, and across Ads what you've seen in the last quarter specifically, the year-over-year growth rate was impacted by the lapping of the U.S. election which impacts obviously YouTube, not surprising. We had this a little bit in Q3 but mostly in Q4 of the previous year.

But we've seen growth across different verticals within YouTube. But I would think about this in that context. And AI is driving growth there for creators. So we talked about Search and how we as consumers use the Search tool. Think about the tools we're now providing for creators. The video compared to the video on YouTube five years ago versus where we are today. The AI tools they have for creation are far beyond where they were just a couple years ago.

I'm sure you've seen the music creation tool within the Gemini App. So we are giving them more tools that are allowing them to create differently. And when they engage more, that means the user engages more with their content. We also look at recommendations within the YouTube -- just within YouTube and then what we can do there. So there are several areas where you're seeing AI impact YouTube growth.

Brian Nowak (Morgan Stanley):<\/strong> Speaking to the breadth of Alphabet, so we've covered Search. We've covered Cloud. We've covered YouTube. Now we're talking about autonomous driving. With Waymo you've made a lot of progress over the last 12 to 24 months. We have you launching in another 25 potential cities over the next 2 years. It seems there's an impressive ramp coming.

What are some of the key hurdles for the investment areas that you really need to execute on Waymo just to sort of hit a lot of these city launches that the company has been posting about?

Anat Ashkenazi, CFO, Google:<\/strong> So we have the Waymo Driver. We call the vehicles the Waymo Driver. It's not an actual driver. Launched in five cities last year. Already launched in five more this year. And as you said, more to come including potential for international cities.

When we make a decision to launch in a market, we look at safety first. So the Waymo team has invested quite significantly ensuring the Waymo Drivers are incredibly safe and the safety track records are very impressive. If you look at the number of accidents versus a human driver. Orders of magnitude different.

So we look at safety. Then we look at the specific markets. Each market -- for example, take the U.S. Every state has its own laws and regulations on what it would take to operate in that market. So we need to make sure it's a market we can operate in from a set of policies. And then be able to launch in that market.

So we do it with a safety-first mindset to make sure we can do this well and scale up rapidly. But you're seeing the demand is so high for these Waymo Drivers that we're trying to launch in as many markets as possible getting to these consumers across the U.S. and outside the U.S. It's one of our areas of investment.

If you look at the Other Bets, there are multiple things in there. And you'll see it as one category, if you look below the water line we are making choices. And the strategy is about making choices of where do we direct investments within the Other Bets category. More to Waymo to be able to scale and get to as many consumers as possible.

Brian Nowak (Morgan Stanley):<\/strong> Interesting question, because on Waymo, I guess, what is the philosophy about sort of if you need to be more asset heavy to fund more cars, to fund more stations in these last miles. Is that an area where you're interested in investing more dollars or are you trying to stay more asset light in balance on the Waymo investment?

Anat Ashkenazi, CFO, Google:<\/strong> You’ve seen us do both, and you're referring to partnerships. Local partnerships with other providers. We'll do both. It will depend on the market and a specific opportunity. It's not that one has to dominate the other. It depends on where we are.

Brian Nowak (Morgan Stanley):<\/strong> Okay. Maybe one to wrap on a big picture. We've covered a lot about how you're using GPUs and TPUs and GenAI. You have a lot of these discussions and questions with investors. What do you think is still the most underappreciated opportunity from all these AI-based investments for Alphabet? And what's the most overhyped opportunity?

Anat Ashkenazi, CFO, Google:<\/strong> I wouldn't say there's an underappreciated or overhyped, but rather -- so we talked about so many areas just in the last 30 minutes or so. And think of all the things we haven't talked about. Alphabet is now such a comprehensive business with AI driving multiple other areas. So we've not talked about, for example, Isomorphic, and what AI can do for drug discovery and what we can bring in terms of curing diseases that are currently not curable.

I come from this field, so I know this well. But being able to accelerate drug discovery is transformational, right, for human health across the globe. We haven't talked about quantum which by the way has potential -- I mean, not today but will have potential implications in a diverse set of areas. We hope to have good use cases within five years or so and we're progressing very well there.

We didn't talk about Robotics and Intrinsic. There's so many areas within the Alphabet business where AI is propelling the potential growth. Now, that's where also comes the discipline of what do you invest in, because you can't invest in everything. You have to make choices. But there are some tremendous opportunities we have across the organization. And you're seeing the results; right? We talked about ROIC. I think a year-and-a-half ago, two years ago it was a promise. Now you see it in the numbers. It's already delivering revenue growth across multiple parts of the business and will propel the future growth as well. Exciting times.

Brian Nowak (Morgan Stanley):<\/strong> Can't wait to see the growth in the ROIC. Thank you so much, Anat.

Anat Ashkenazi, CFO, Google:<\/strong> Thank you.<\/p>","DocumentFileSize":"188 KB","DocumentFileType":"PDF","DocumentPath":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/Mar\/03\/Anat-Ashkenazi-Morgan-Stanley-Transcript-03-03-26.pdf","EventId":1039,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"00000000-0000-0000-0000-000000000000","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2026\/Anat-Ashkenazi-SVP-and-CFO-of-Alphabet-and-Google-at-the-Morgan-Stanley-Technology-Media-and-Telecom-Conference-on-March-3-2026-2026-r9dUUoVl6o\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"00000000-0000-0000-0000-000000000000","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"","ReportYear":"","RevisionNumber":44423,"SeoName":"Anat-Ashkenazi-SVP-and-CFO-of-Alphabet-and-Google-at-the-Morgan-Stanley-Technology-Media-and-Telecom-Conference-on-March-3-2026-2026-r9dUUoVl6o","TagsList":null,"TimeZone":"PT","Title":"Anat Ashkenazi, SVP and CFO of Alphabet and Google, at the Morgan Stanley Technology, Media and Telecom Conference on March 3, 2026","WebCastLink":"","WorkflowId":"04da214d-5f7d-4dd5-b8fb-0e9d79a0b581","EndDate":"03\/03\/2026 13:20:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"03\/03\/2026 12:20:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"Q1 2026 Webcast Link","Type":"Document","Url":"https:\/\/www.youtube.com\/watch?v=LPJoiDiVkTI"},{"ContentFileWorkflowId":null,"DocumentType":"file","Extension":"PDF","Size":"148 KB","Title":"For a PDF version of the transcript, please click here","Type":"Document","Url":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/Apr\/29\/Alphabet-2026_Q1_Earnings_Transcript.pdf"}],"Body":"

This transcript is provided for the convenience of investors only, for a full recording please see the <\/em>Q1 2026 Earnings Call webcast<\/em><\/a>.<\/em><\/p>\n

Operator: <\/strong>Welcome, everyone. Thank you for standing by for the Alphabet First Quarter 2026 Earnings Conference Call.<\/p>\n

At this time, all participants are in a listen only mode. After the speaker presentations, there will be a question and answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/p>\n

I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. Please go ahead.<\/p>\n

Jim Friedland, Head of Investor Relations: <\/strong>Thank you. Good afternoon everyone, and welcome to Alphabet's first quarter 2026 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi.<\/p>\n

Now I'll quickly cover the Safe Harbor.<\/p>\n

Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward looking statement.<\/p>\n

During this call, we will present both GAAP and non GAAP financial measures. A reconciliation of non GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>\n

Our comments will be on year over year comparisons unless we state otherwise.<\/p>\n

And now I'll turn the call over to Sundar. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Jim. <\/p>\n

Hi, everyone, and thanks for joining us today.  It was a terrific quarter for Alphabet. Our momentum was on full display at Cloud Next last week, and the month of May brings even more with I\/O, Brandcast and GML. I hope you'll tune in to see our progress.<\/p>\n

It's clear that our AI investments and full stack approach are driving performance across our business.<\/p>\n

In Search & Other, revenue grew 19%. People love our AI experiences like AI Mode and AI Overviews, and they're coming back to Search more.<\/p>\n

Cloud accelerated again this quarter due to strong demand for our AI products and infrastructure. Revenue grew 63%, exceeding $20 billion for the first time, and our backlog nearly doubled quarter on quarter to over $460 billion. Gemini Enterprise is seeing tremendous momentum, with 40% growth quarter over quarter in paid monthly active users.<\/p>\n

In Subscriptions, this was our strongest quarter ever for our consumer AI plans, primarily driven by adoption of the Gemini App. Overall, the number of paid subscriptions has now reached 350 million, with YouTube and Google One being the key drivers.<\/p>\n

And our AI models have great momentum. Our first party models now process more than 16 billion tokens per minute via direct API use by our customers, up from 10 billion last quarter.<\/p>\n

Today, I'll share our progress across the AI full stack. Then Search and Cloud, followed by YouTube and Other Bets.<\/p>\n

Starting with our AI infrastructure. It's the foundation of our full stack approach to AI, driving customer growth and product adoption.<\/p>\n

Our custom TPUs, Axion CPUs, and the latest NVIDIA GPUs continue to form the industry's widest variety of compute options.NVIDIA GPUs are a core part of our AI accelerator portfolio, and we will be among the first to offer NVIDIA Vera Rubin NVL72, in addition to the Blackwell- and Hopper-based instances already available.<\/p>\n

At Cloud Next, we introduced our eighth generation TPUs, individually specialized for training and serving, and able to take on the most demanding agentic workloads.<\/p>\n

TPU 8t provides high performance model training with three times the processing power of Ironwood and two times the performance.<\/p>\n

TPU 8i delivers cost effective, low latency inference, with 80% better performance per dollar than the prior generation.<\/p>\n

This exceptional infrastructure powers our world class AI research. That includes models and tooling, which continue to progress really well.<\/p>\n

Gemini 3.1 Pro continues to push the frontier in reasoning, multimodal understanding and cost. We've quickly expanded the Gemini 3.1 series of models to offer more choices for developers, including our cost efficient Flash models.<\/p>\n

3.1 Flash Live, our latest audio model, has improved precision and reasoning, making voice interactions more natural and intuitive. It's now powering conversational features in Search and the Gemini app. Speech to text is now available in 70 languages.<\/p>\n

And with 3.1 Pro, our Deep Research agent got a big upgrade, including MCP support and native visualizations.<\/p>\n

Our generative media models are incredibly popular. Lyria 3 has generated over 150 million songs since launching on the Gemini App.<\/p>\n

Nano Banana 2 reached one billion images in nearly half the time of Nano Banana 1.<\/p>\n

And Veo 3.1 Lite is our most cost efficient video model to date.<\/p>\n

On top of this, we launched Gemma 4, our most intelligent open model. It's been downloaded over 50 million times in just a few weeks. In fact, our open models have now been downloaded over 500 million times.<\/p>\n

Looking ahead, we are focused on pushing the next frontiers of foundation models, including intelligence, agents and agentic coding. And we are using the latest technologies to transform how we work as a company.<\/p>\n

For example, with Antigravity, we are shifting to truly agentic workflows. Our engineers are now orchestrating fully autonomous digital task forces, and building at a faster velocity. Much more to come here.<\/p>\n

Next, we are bringing helpful AI into the hands of billions of people every day through our products and platforms.<\/p>\n

Earlier this year, we introduced Personal Intelligence, which helps people get more personalized and helpful responses. It's now in the Gemini app, AI Mode and Gemini in Chrome. Early traction has been good, and this month we integrated Nano Banana 2 to make personalized image creation possible in the Gemini app.<\/p>\n

Maps recently got its most significant upgrade in over a decade with Gemini. Users can now have a conversation with Maps and get more personalized suggestions and intuitive directions.<\/p>\n

And the Pixel 10a launched to positive reviews, providing the best of Google's AI features like Gemini Live and AI powered camera features.<\/p>\n

Turning to Search. AI continues to drive Search usage, and queries are at an all time high.<\/p>\n

We continue to invest in improvements to AI Overviews, which are driving overall Search growth, and we are also seeing strong growth in both users and usage of AI Mode globally.<\/p>\n

Personal Intelligence expanded broadly in the U.S. and we are seeing people ask more personal questions, and getting responses that are uniquely relevant to them.<\/p>\n

We also shipped agentic experiences, like restaurant booking, to new countries and new multimodal capabilities like Search Live globally.<\/p>\n

We're also continuing to improve efficiency and speed. Even as we have brought new AI features into our results page, we have reduced Search latency by more than 35% over the past five years.<\/p>\n

And since upgrading AI Overviews and AI Mode to Gemini 3, we have reduced the cost of core AI responses by more than 30%, thanks to continued hardware and engineering breakthroughs.<\/p>\n

We are excited to share more about Search at I\/O.<\/p>\n

Now, over to Google Cloud.<\/p>\n

Google Cloud is differentiated because we are the only provider to offer first party solutions across the entire Enterprise AI stack. Our growth in revenue, operating margin, and backlog highlights this differentiation. Our Enterprise AI solutions have become our primary growth driver for Cloud for the first time. In Q1, revenue from products built on our gen AI models grew nearly 800% year over year.<\/p>\n

We are winning new customers faster, with new customer acquisition doubling compared to the same period last year.<\/p>\n

We are seeing strong deal momentum, doubling the number of $100 million to $1 billion deals year on year, and signing multiple billion dollar plus deals. And we are deepening relationships with existing customers. Customers outpaced their initial commitments by 45%, accelerating over last quarter.<\/p>\n

At Cloud Next last week, we introduced hundreds of new capabilities across our vertically optimized AI stack that are designed to work together for our enterprise customers.<\/p>\n

We introduced a new Gemini Enterprise Agent Platform that empowers users to build, orchestrate, govern and optimize agents with the controls that enterprise customers need.<\/p>\n

Along with new capabilities in Gemini Enterprise app — like Projects, Canvas, Long Running Agents and Skills, every employee can build agents.<\/p>\n

In Q1, Gemini Enterprise paid monthly active users grew 40% quarter over quarter. That includes major global brands like Bosch, Citi Wealth, Merck, and Mars, Incorporated.<\/p>\n

Our partner ecosystem plays an increasingly critical role in driving Gemini Enterprise adoption. We saw 9x year over year growth both in seats sold with partners, and in the number of partners adopting it for internal use. <\/p>\n

This momentum is leading to accelerating usage of our models.<\/p>\n

Over the past 12 months, 330 Google Cloud customers each processed over one trillion tokens. 35 reached the ten trillion token milestone.<\/p>\n

To give agents business context from enterprise data to help them reason intelligently, we introduced a new Agentic Data Cloud. It includes a cross cloud Lakehouse, Knowledge Catalog and Deep Research Agents, which combine research and analytical skills.<\/p>\n

As an example, using our data cloud, American Express is enabling agentic commerce at scale by moving an enterprise data platform, along with hundreds of production applications, to BigQuery. Vodafone is proactively resolving outages, automating network planning and precisely targeting capacity.<\/p>\n

Enterprise data has become critical for agents to reason. Our strength with Big Query and Gemini Enterprise has led Gemini powered workflows in Big Query to grow over 30X year over year.<\/p>\n

As cybersecurity threats from the use of AI models accelerate, our expertise in AI and Cybersecurity is driving strong demand for our Agentic Defense offerings. In March, we closed the acquisition of Wiz, a leading cloud and security AI platform, which is an incredible fit for the moment we are in. We've seen tremendous interest from customers in our unique cybersecurity and AI products and services to protect their IT estate. The performance of Wiz so far has exceeded our expectations.<\/p>\n

Together with Google's Threat Intelligence, Security Operations and AI models, Wiz is helping organizations detect, prevent and respond to threats.<\/p>\n

We introduced new Gemini powered agents for threat detection, continuous red teaming, and automated remediation to protect software code and Cloud systems<\/p>\n

Customers like Deloitte, Priceline and Shell are using our agentic defense to strengthen their security posture. All of this is powered by the AI Infrastructure I mentioned earlier.<\/p>\n

Our TPUs continue our leadership in performance, cost and power efficiency for customers like Thinking Machines Lab, Hudson River Trading and Boston Dynamics. As TPU demand grows from AI labs, capital markets firms, and high performance computing applications, we will begin to deliver TPUs to a select group of customers in their own data centers in a hardware configuration to expand our addressable market opportunity.<\/p>\n

Turning to YouTube, where our momentum continues.<\/p>\n

In the Living Room, U.S. viewers are watching over 200 million hours of YouTube content daily.<\/p>\n

And as of March, we've reached a new milestone with over ten million channels now publishing Shorts each day. This level of daily activity is a testament to how people enjoy this content and how we've made it easier for creators.<\/p>\n

And in Q1, our YouTube Music and Premium offering saw its largest quarterly increase in the total number of non-trial subscribers, both globally and in the US, since YouTube Premium launched in June 2018. I hope you'll tune in to Brandcast on May 13.<\/p>\n

Moving to Other Bets.<\/p>\n

Waymo is on a great trajectory. It launched in Nashville a few weeks ago. That makes six new cities so far in 2026, and operations in eleven major U.S. cities in total. Waymo also surpassed 500,000 fully autonomous rides per week, doubling in less than a year.<\/p>\n

Wing continues to expand across the U.S in partnership with Walmart and Doordash, and announced plans to operate in the Bay Area.<\/p>\n

In summary, a terrific start to the year. With so many great opportunities ahead, we're not slowing down. Huge thanks to all our employees and our partners.<\/p>\n

See you at I\/O on May 19th.<\/p>\n

Philipp, over to you. <\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>Thanks, Sundar, and hello, everyone.<\/p>\n

As usual, I'll start with the performance of Google Services, then cover the progress we are delivering across Search, YouTube and Partnerships.<\/p>\n

Google Services revenues were $90 billion for the quarter, up 16% year on year, primarily driven by the continued growth of Search.<\/p>\n

Adding some further color to our results:<\/p>\n

Search and Other delivered 19% growth, primarily driven by Retail and Finance.<\/p>\n

YouTube advertising revenues grew 11% driven by Direct Response, followed by Brand.<\/p>\n

And Network advertising revenues were down 4% year on year.<\/p>\n

Starting with Search and Other revenues, which delivered $60 billion in revenue for the quarter.<\/p>\n

We are accelerating the deployment of Gemini across our entire ads infrastructure to help businesses reach more customers, in more places, than ever before. This is driving significant improvements across all areas of marketing, and continues to fuel new performance breakthroughs across three areas critical for our customers' success: ads quality, advertiser tools and new AI user experiences.<\/p>\n

First, ads quality. AI is boosting our ability to deeply understand user intent for a given search query and to find the most relevant ads.<\/p>\n

Even when we don't have a direct user query, we are making significant strides in improving relevance. In Discover, new AI models and classifiers are driving higher relevance by better aligning ads with unique user interests. In Maps, we are using Gemini to ensure \"Promoted Pins\" are deeply relevant to a user's surroundings, location of interest, history and intent. This work is improving ads relevance by nearly 10% leading to significant increase in user engagement.<\/p>\n

We're pairing this strengthened prediction driven relevance with bottom of funnel precision. Over the past year, we've made over 20 improvements to Search and Shopping bid strategies. Smart Bidding now uses Gemini to match user intent to an advertiser's products and services more accurately and further drive performance. This level of granularity was previously impossible to achieve at scale.<\/p>\n

Second, on advertiser tools, where Gemini helps advertisers drive more efficient and effective campaigns.<\/p>\n

People no longer search in fragments; they search conversationally and share more context. We launched AI Max to help advertisers adapt to this new way of searching, and, earlier this month, it moved out of beta, with improved performance quality across targeting and creative capabilities.<\/p>\n

Take Hilton EMEA. They captured one third more clicks for a fifth of the spend, while simultaneously increasing the average booking value by 55%.<\/p>\n

And Etsy saw a 10% search volume uplift, with 15% of those queries being net new to their business.<\/p>\n

We see significant opportunity as advertisers continue to make good progress on AI readiness and the adoption of AI tools. For instance, more than 30% of our customers' Search spend now uses AI enabled campaigns AI Max or Performance Max. And these advertisers are seeing more conversion for the same spend.<\/p>\n

Third, how we monetize new AI user experiences in Search. We aren't just bringing existing ad formats into AI experiences, we are reinventing ads for this new era. Direct Offers in AI Mode are resonating with users and continue to receive positive customer feedback. Gap, L'Oréal and Chewy are just some of the latest partners who have now signed up to test this Google Ads pilot.<\/p>\n

We are also exploring new formats for retailers. AI Mode already surfaces organic product recommendations based on a users' query, and we are now testing a new ad format that displays retailers who sell those recommended products.<\/p>\n

In addition, the retail industry is rapidly coalescing around the open source Universal Commerce Protocol, or UCP, we launched in January in partnership with the ecosystem. Last week we welcomed Amazon, Meta, Microsoft, Salesforce and Stripe as new members to the UCP Tech Council. They join founding members Shopify, Etsy, Target, Wayfair and Google to further accelerate the transition toward an agentic future.<\/p>\n

Partners like Sephora and Macy's have joined companies like Ulta Beauty, who are already rolling out UCP and can now redefine consumer journeys from discovery to checkout.<\/p>\n

Ulta Beauty just last week launched agentic commerce within AI Mode in Search and the Gemini app. Shoppers can now review product recommendations, compare options and complete streamlined checkout for eligible purchases, directly within AI Mode and Gemini.<\/p>\n

Turning to YouTube, which has now led streaming watch time in the U.S. for three consecutive years.<\/p>\n

We are in an unmatched position to connect brands with the audiences they care about, in the moments they engage in. We are applying Gemini to drive better matching and discovery between brands and creators of all sizes.<\/p>\n

Gemini now powers YouTube Creator Partnerships, a centralized platform integrated directly into YouTube Studio for creators and Google Ads for advertisers.<\/p>\n

We've also made it easier to buy premium ad space in top tier podcast shows, by curating the most watched podcasts into popular genres.<\/p>\n

For example, Supergoop partnered with YouTube creator Liza Koshy on a multi-format Shorts and long form CTV campaign, resulting in a 93% lift for their \"glowscreen\" product and a 55% overall brand lift.<\/p>\n

Looking at monetization across YouTube, momentum continues in Shorts and the Living Room, and Demand Gen continues to drive momentum in Direct Response, in particular with smaller advertisers. Brand too is benefiting from growth in the Living Room where we continue to scale creator brand deals.<\/p>\n

YouTube Subscriptions revenue continues to grow faster than ads, particularly YouTube Music & Premium. By the end of Q1, YouTube Premium Lite was fully launched in 23 countries and we plan to launch in more than a dozen new countries in Q2.<\/p>\n

As always, I'll wrap with the progress we're seeing across Partnerships. Retailers are increasingly looking to Google to support their AI transformation.<\/p>\n

This quarter Kingfisher, Target and Wayfair closed significant multi year Cloud and Ads deals. Combined with their implementation of UCP, these partnerships will help deliver personalized, AI driven agentic experiences, from discovery to checkout.<\/p>\n

In closing, I'd like to thank Googlers everywhere for their contributions to our success; and, as always, to our customers and partners for their continued trust.<\/p>\n

Anat, over to you. <\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thank you, Philipp. <\/p>\n

My comments will focus on year over year comparisons for the first quarter, unless I state otherwise.<\/p>\n

I will start with results at the Alphabet level, and will then cover our segment results. I'll end with some commentary on our outlook for the second quarter and full year 2026.<\/p>\n

We had an outstanding first quarter, delivering our 11th consecutive quarter of double digit revenue growth. <\/p>\n

Consolidated revenue reached $109.9 billion, up 22%, or 19% in constant currency.<\/p>\n

Total cost of revenue was $41.3 billion, up 14%. TAC was up $15.2 billion, up 11%.<\/p>\n

Other Cost of Revenues was $26 billion, up 15%, primarily driven by increases in depreciation, content acquisition costs largely, for YouTube, and compensation.<\/p>\n

Total operating expenses were up 24% to $28.9 billion.<\/p>\n

R&D expenses increased by 26%, driven by compensation due to investment in AI talent, as well as depreciation. <\/p>\n

Sales and Marketing expenses were up 23%, driven primarily by marketing investments to support the Gemini app and Search, as well as compensation.<\/p>\n

G&A expenses increased 21%, primarily due to an increase in compensation and costs related to legal and other matters.<\/p>\n

Operating income increased 30% to $39.7 billion, and operating margin was 36.1%.<\/p>\n

Other income and expenses was $37.7 billion, representing a meaningful increase from the prior year, primarily due to unrealized gains in our nonmarketable equity securities portfolio. <\/p>\n

Net income increased 81% to $62.6 billion, and earnings per share increased 82% to $5.11.<\/p>\n

We generated operating cash flow of $45.8 billion in the first quarter and $174.4 billion for the trailing 12 months. <\/p>\n

CapEx was $35.7 billion in the first quarter, with the overwhelming majority of this spend in technical infrastructure to support the AI opportunities we see across the company.<\/p>\n

Approximately 60% of our investment in technical infrastructure this quarter was in servers, and 40% was in data centers and networking equipment.<\/p>\n

Free cash flow was $10.1 billion in the first quarter and $64.4 billion for the trailing 12 months.<\/p>\n

We ended the quarter with $126.8 billion in cash and marketable securities and $77.5 billion in long-term debt. <\/p>\n

And as we announced today, our Board of Directors declared a 5% increase in the quarterly dividend.<\/p>\n

Turning to segment results, Google Services revenues increased 16% to $89.6 billion, reflecting strong growth in Search and Subscriptions. Google Services revenues also benefited from a strong FX tailwind. <\/p>\n

Google Search and other advertising revenues increased by 19% to $60.4 billion, driven by growth in the retail and financial services verticals. <\/p>\n

YouTube advertising revenues increased 11% to $9.9 billion, driven by Direct Response advertising as well as Brand.<\/p>\n

Network advertising revenues of $7 billion were down 4%.<\/p>\n

Subscriptions, Platforms & Devices revenues increased 19% this quarter to $12.4 billion due to strong growth in both YouTube subscriptions, particularly in YouTube Music and Premium, and Google One subscriptions, which benefited from increased demand for AI plans.<\/p>\n

Google Services operating income increased 24% to $40.6 billion, and operating margin was 45.3%.<\/p>\n

The Google Cloud segment delivered outstanding results in the first quarter. Cloud revenues accelerated across all key areas and were up 63% to $20 billion. Revenue growth was driven by strong performance in GCP, which continued to grow at a rate that was much higher than Cloud's overall revenue growth rate. <\/p>\n

The largest contributor to Cloud's growth this quarter was AI solutions, driven by strong demand for industry leading models, including Gemini 3. In addition, we had strong growth in AI infrastructure due to continued deployment of TPUs and GPUs; and core GCP continues to be a sizable contributor, driven by demand for infrastructure and other services such as cybersecurity and data analytics.<\/p>\n

Workspace again delivered strong double digit revenue growth, driven by an increase in the number of seats and the average revenue per seat.<\/p>\n

Cloud operating income was $6.6 billion, tripling year over year, and operating margin increased from 17.8% in the first quarter of last year to 32.9%.<\/p>\n

Google Cloud's backlog nearly doubled sequentially, reaching $462 billion at the end of the first quarter. The increase was driven by strong demand for our enterprise AI offerings and the inclusion of TPU hardware sales that Sundar referenced earlier. The majority of the backlog is related to typical GCP contracts, and we expect to recognize just over 50% of the backlog as revenue over the next 24 months.<\/p>\n

In Other Bets, revenues were $411 million, and operating loss was $2.1 billion.<\/p>\n

For the past few years, we have been working to prioritize our efforts and investments in the Other Bets. In Q1 of this year, Verily completed an external capital raise that resulted in its deconsolidation from Alphabet. GFiber announced plans to combine with Astound Broadband, which will result in its deconsolidation from Alphabet when the deal closes, which we expect to take place in Q4. <\/p>\n

And we continue to allocate significant resources to businesses where we see meaningful opportunities to create value, such as Waymo.<\/p>\n

Turning to our outlook, I would like to provide some commentary on factors that will impact our business performance in the second quarter and full year 2026.<\/p>\n

First, in terms of revenues, we're pleased with the overall momentum of the business. At current spot rates, we would expect to see an FX tailwind of approximately one percentage point toward consolidated revenue in Q2, compared to three percentage points FX tailwinds in the first quarter.<\/p>\n

In Google Cloud, as Sundar mentioned, we will begin to deliver TPU hardware to a select group of customers in their own data centers. We expect to begin recognizing a small percent of the revenues from these agreements later this year, with the vast majority of revenues to be realized in 2027. <\/p>\n

It is important to keep in mind that revenues from TPU hardware sales will fluctuate from quarter to quarter, depending on when TPUs are shipped to customers.<\/p>\n

And finally, we're excited to welcome the Wiz team to Google Cloud with the closing of the acquisition in March, and are very pleased with the performance to date.<\/p>\n

A couple of items to highlight related to the acquisition. First, Wiz will be reporting in the Google Cloud segment. And second, we expect a low single digit percentage point headwind to Cloud's operating margin for the remainder of 2026 related to the acquisition.<\/p>\n

Moving to investment, we are updating our full year 2026 CapEx guidance range to $180 to $190 billion, up from our previous estimate of $175 to $185 billion, to now include investment related to the acquisition of Intersect, which closed in March.<\/p>\n

We are seeing unprecedented internal and external demand for AI compute resources. The investment we're making in AI is delivering strong growth, as evidenced by the record revenue and backlog growth in Google Cloud and strong performance in Google Services.<\/p>\n

Looking ahead, these strong results reinforce our conviction to invest the capital required to continue to capture the AI opportunity. As a result, we expect our 2027 CapEx to significantly increase compared to 2026.<\/p>\n

In terms of expenses, as we've discussed previously, the significant increase in our investments in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expense and related data center operations costs, such as energy. We also expect to continue hiring in key investment areas such as AI and Cloud, and are investing in marketing to support our AI products.<\/p>\n

To conclude, Q1 was an outstanding quarter for Alphabet, and our teams continue to execute with high level of discipline and velocity, delivering amazing innovation. We look forward to sharing more in the coming weeks at I\/O, Google Marketing Live, and Brandcast.<\/p>\n

I'm going to take this opportunity to thank our employees for their contributions to our performance. <\/p>\n

Sundar, Philipp and I will now take your questions. <\/p>\n

Operator: <\/strong>Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated. <\/p>\n

Your first question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>\n

Brian Nowak (Morgan Stanley): <\/strong>Thanks for taking my questions. I have two. <\/p>\n

The first one, Sundar, on a recent podcast, you talked about how you were acutely constrained on compute, something you focused on almost every week to make sure you're deploying capacity correctly. So let me ask you this. <\/p>\n

As you sort of look at the Search business, what are the areas that you are most excited about applying next generation compute toward, to sort of generate an ROIC on that return in Search in the next 12 months?<\/p>\n

Then the second one is on the sale of the TPUs to third parties. Can you help us philosophically understand the strategy around pricing them, given the high ROIC of using TPUs to power multiyear Google Cloud workloads, a little bit? Thanks. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Brian. I'll take the Search one first.<\/p>\n

Obviously, you've seen we are taking advantage of all our investments in building the Gemini models, and both obviously applying it in Search and the Gemini app, driving innovations in AI Overviews and AI Mode. And they're all contributing to the increased usage of the product.<\/p>\n

I do think looking ahead across both these surfaces, there is a massive opportunity to go deeper in what we do for our users. I think bringing agentic workflows to consumers in a way that it's easy for them to do, including in the context of Search, I see as a huge opportunity ahead, and obviously, we are in very, very early innings of all that. <\/p>\n

But our investments in our full stack of AI approach I think puts us in a good position to bring those experiences to Search, and I'm pretty excited about it.<\/p>\n

On the second question around TPUs, obviously, we do think about it as what are we doing through Google Cloud to help our customers, and that's the framework with which we think about it.<\/p>\n

In that context, there are situations where it makes sense, for example, you take customers like capital markets, where they're running these highly performant AI workloads, they wanted TPUs in their data centers. Those trends are true across a diverse set of industries, and in certain cases, frontier AI labs, too. And so we are opportunistic about it.<\/p>\n

But I do think we step back and think about it overall as the opportunity for Google Cloud. A lot of it is providing infrastructure through Cloud. At times, it is direct sales of TPU hardware to a select group of customers.<\/p>\n

But again, we do take ROIC approach, and some of it helps us get more economies of scale, scale in our overall compute environment as well. And so, it helps us invest in the cutting edge, which we need to do with the next generation as well. <\/p>\n

Brian Nowak (Morgan Stanley): <\/strong>Thanks, Sundar. <\/p>\n

Operator: <\/strong>Your next question comes from Doug Anmuth with JP Morgan. Your line is now open.<\/p>\n

Douglas Anmuth (JP Morgan): <\/strong>Thanks so much for taking the questions. One for Anat and one for Philipp.<\/p>\n

Anat, you talked about 2027 CapEx, that it will increase significantly. And I know you didn't quantify it, but how do you think about the current CapEx trajectory's ability to service this massive backlog that you've built up in just the last quarter, and what will no doubt increase going forward?<\/p>\n

Then, Philipp, can you just talk more about the drivers of Search queries at an all time high? And then how you're thinking about how much room there may be to increase coverage of Search queries, just the ability to show Ads against the higher percentages of queries than the 20% you've been at historically. Thanks.<\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thanks, Doug, for the question. Let me start with your first question on CapEx and how we think about CapEx increase going into 2027.<\/p>\n

You've seen us over the past several years increase CapEx every year. And we have done it very thoughtfully to meet the demand that we are seeing, both from external customers as well as demands across the organization.<\/p>\n

And you're seeing the proof point, the ROIC on that, in terms of just the growth rate we're seeing, whether it's growth rate within Search or certainly the Cloud business, and the opportunity we have within the Cloud backlog.<\/p>\n

So as we're seeing that robust demand across the business, we are looking at what can we do to support that growing demand and the opportunity ahead of us, and increasing CapEx to meet that demand we’ll provide more clarity in a future earnings call about what that number will be. <\/p>\n

But that's the opportunity we're seeing ahead of us. It's quite meaningful, and we want to make sure we capitalize [on] that and we do it in a way that's responsible, as we've done to date.<\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>So, on the second part of your question, first of all, just to zoom out for a second. <\/p>\n

I mean, we're very pleased with the performance of our Ads business here. As Anat shared, Google Services benefitted from a strong FX tailwind. That's important to keep in mind.<\/p>\n

The strength we saw in Search was not due to a single driver, but was really the result of many parts of our business showing strength and working very well together. If I just deep dive for a second with the vertical perspective, Retail, Finance, I talked about it and Health, drove the greatest contribution, although all major verticals actually contributed. And we make hundreds of changes every quarter to improve the user experience, the advertiser experience. And so that's really contributing to our performance here.<\/p>\n

And we've also been able to generate very strong Ads performance while significantly evolving the Search results. Each year, the queries continue to grow, and as Sundar mentioned, they were at an all time high. <\/p>\n

We see AI Overviews and AI Mode continue to drive greater Search usage and growth in overall queries, including in commercial queries. <\/p>\n

You specifically asked about the 20% on the coverage side, and as I said before, I think with the ability of AI to better understand intent and a lot of other vectors around it, I think there is upside in that coverage number. <\/p>\n

And overall, just the understanding that we have with Gemini on intent has just significantly expanded our ability to deliver Ads on longer, more complex searches that were previously really difficult to monetize. <\/p>\n

So, and I shared earlier, we are deploying our Gemini models now across all of our Ads infrastructure, and it's really driving improvements across the big three areas that I highlighted in my prepared remarks. <\/p>\n

Douglas Anmuth (JP Morgan): <\/strong>Thank you both. <\/p>\n

Operator: <\/strong>Our next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>\n

Eric Sheridan (Goldman Sachs): <\/strong>Thanks so much for taking the questions. Maybe two, if I could.<\/p>\n

The first one, just building on the answers so far, when you look at the backlog you disclosed today, Sundar, would love to know if you can come back to your comments on AI infrastructure and your unique approach and how that positions you to either build capacity, scale compute, and do it in a way that is, as Anat said, sort of effective from a margin standpoint as well as a compute standpoint? Just to understand where you sit competitively in your mind relative to others. That would be one.<\/p>\n

Then, Philipp, to bring you into the conversation, you referenced UCP, and there's been a lot of industry inertia around UCP. Very quickly, talk to us a little bit about what UCP means for the Services business as agentic commerce scales in the years ahead. Thanks so much.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Eric.<\/p>\n

Look, I do think we are genuinely differentiated. We are unique in the market because of our vertically optimized AI stack and the way we co-develop the components from our infrastructure and models, to platforms and the tools, to applications and agents. <\/p>\n

And the fact that we own frontier models, own the silicon, really helps us stay ahead of the curve. And on top of it all, just to put an extra point on it, the deep investment in our security layers to keep everything safe.<\/p>\n

And I think we are the only provider on the market that offers all of these in a vertical stack.<\/p>\n

So overall, again, to my earlier comments to Brian, I think about it all as Google Cloud. We have many different ways to serve our customers, so we can meet them, in a way, suited to their needs, I think better than other players here.<\/p>\n

And I do think, looking ahead, our ability to invest in this moment and stay at the frontier puts us in a strong position. And I think we are doing it based on tangible demand signals we are seeing, and it's not just on the revenue side, but I'm talking from an ROIC framework. And that's what is helping us navigate this moment responsibly. <\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>And to the second part of your question, look, we're in the early stages of the agentic era. Agentic is more than just completing transactions. We all know this. We see agentic experiences as additive, and it will really transform how we shop, from discovery to decisions, while helping, obviously, brands differentiate themselves. <\/p>\n

We've been very intentional about creating an agentic experience that works for our users, our partners, for the entire ecosystem, and our goal is really to remove the grunt work of shopping, so consumers can focus on the enjoyable parts. <\/p>\n

For decades, you could either shop fast or smart, and I think with agentic commerce, you no longer have to actually choose between speed and certainty here, and the vision is to make commercial experiences across the board assistive, more personal, more fluid. <\/p>\n

We're carefully designing space and agentic workflows for users to really see valuable components of their shopping journey, beyond just price, such as customer service, brand loyalty, and more, while removing the friction of the process that I just talked about, and this is exactly where that part of your question kicks in, the universal commerce protocol, the new open standard for agentic commerce that works actually across the entire shopping journey, from the discovery to the buying and the post purchase support that we just talked about.<\/p>\n

And it was really co-developed with the industry leaders, including, I mentioned Shopify, Etsy, Walmart, and so on. We've received tremendous feedback so far from hundreds of top tech companies, payments partners, retailers, really interested in integrating. And it will help power a new checkout experience in AI Mode, in Search, in the Gemini app, and allowing shoppers to actually check out from select merchants right as they're researching on Google and going through this journey. <\/p>\n

So we're very, very excited about it. <\/p>\n

Operator: <\/strong>Our next question comes from Ross Sandler with Barclays. Your line is now open. <\/p>\n

Ross Sandler (Barclays): <\/strong>Just following up on the last question on agentic shopping. It seems like we're at the point in time where this is actually going to start happening finally.<\/p>\n

Philipp, just to elaborate a little bit, as you look at carrying the ad words business from kind of the old way of doing things to this new agentic frictionless shopping way, how do you see the price and volume growth trends for core ad words evolving as you start implementing more agentic workflows in Search?<\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>Look, our number one focus is obviously on the user experience here, and I think the most important part in this is what I mentioned before. We're carefully designing this space in the agentic workflows for the users to actually see the valuable components within that shopping journey. And the second you have the space, you obviously have the ability for interesting advertising models.<\/p>\n

I think it's also worthwhile noting that beyond just the traditional agents, there's a lot of additional ways we can actually use AI to improve the shopping experience. You can think about it like our apparel try-on tool that is now available in the U.S. You can think about Google Lens. <\/p>\n

So there's a lot more to do here, but I think the key part is actually what I said before. We focus on the user experience here, and then I think all else will follow if we pay attention to the points I mentioned. <\/p>\n

Operator: <\/strong>Your next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.<\/p>\n

Michael Nathanson (MoffettNathanson): <\/strong>Thanks. One for Sundar, one for Philipp.<\/p>\n

Sundar, if I can connect Brian's question and Eric's question and go a little bit higher, I want to understand how are you deciding, how are you allocating which divisions and projects get excess capacity, even though you're constrained? How do you decide between all the internal projects you have and the external projects? What types of screens are you running to decide who gets the ample capacity?<\/p>\n

Then for Philipp, I noticed that you said this on the Gemini app, there's more and more images that come to you in the shopping journey. Can you talk about your thoughts about adding advertising on that app and what's guiding your decision making here on adding ads on Gemini? Thanks.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Michael. I think, great question on an ongoing basis, and I'm looking forward to Gemini helping me more and more as I'm thinking that through.<\/p>\n

Look, I do think that the foundation where we start with it is, what do we need from a R&D standpoint to develop models at the frontier. So what do you need for training these models? And so, effectively, the compute needed for GDM, because it's a foundation for everything we do. So that's a core principle with which we operate.<\/p>\n

Then obviously, the ability to plan ahead. We do long range plans on our core areas, be it Search, be it YouTube, and so on, as well as what we see in Google Cloud. <\/p>\n

And obviously, in Google Cloud, we are providing enterprise AI solutions, which this quarter had an 800% year on year increase from the prior year. So we're seeing strong demand for Gemini enterprise, our AI solutions there.<\/p>\n

We see strong demand for infrastructure in Google Cloud. And as I said earlier, in certain cases, we are seeing demand for TPU hardware; TPU hardware in other data centers as well.<\/p>\n

So we are modeling these out and working to allocate across these areas. Obviously, we are compute constrained in the near term. And as an example, our Cloud revenue would have been higher if we were able to meet the demand.<\/p>\n

So we are working through that moment and we are investing, but we have a robust long range planning framework, and we see extraordinary opportunities ahead, and we are allocating with that framework in mind.<\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>And to the second part of your question, as I said in my previous answer, we are obviously focused on the user first and creating a really great user experience with all of our product, especially on newer products; and specifically on monetization in the Gemini app, our focus right now is on AI Mode. <\/p>\n

But it's fair to say that we really believe the format that works well in AI Mode would transfer successfully to Gemini app. And so, today in the Gemini app, we're focused on the free tier and subscriptions and our AI plans were a sizable contributor to our Google One revenue growth. <\/p>\n

But let's also be clear, Ads have always been a big part of scaling products to reach billions of people, and if done well, Ads can be really valuable and really helpful commercial information. At the right moment, we'll share any plans, as we have said, but we're not rushing anything here. <\/p>\n

Michael Nathanson (MoffettNathanson): <\/strong>Thank you. <\/p>\n

Operator: <\/strong>Your next question comes from Mark Shmulik with AllianceBernstein. Your line is now open.<\/p>\n

Mark Shmulik (Bernstein): <\/strong>Yes, thanks for taking the question. Philipp, one more on Search performance, if I can.<\/p>\n

You talked a few times about optimizing to the consumer experience. And I guess besides higher query volume, is it fair to conclude that consumers are using these AI tools, Google's or otherwise, and it's shrinking their purchasing journeys, converting at higher rates? <\/p>\n

And if so, is there a way to dimensionalize how much of the strength of Search is being driven by that behavioral change, against perhaps some of the newer advertiser AI tools that you've been launching and rolling out? Thank you.<\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>I think the way to think about it is really to think about the expansionary moment we see here for Search. This is the key part. AI is fundamentally changing how the world searches for, and how it accesses information. Queries are at an all time high. Sundar said this. <\/p>\n

Traditional Search really started with ten blue links, and now we have AI Overviews and AI Mode. And they have made Search more intelligent than ever, and they let you ask far more complex questions. <\/p>\n

And we have Lens or Circle to Search. We have Search Live. Search Live is now available to all countries and languages that support AI Mode. Again, it shows you the expansionary nature of it. We have our AI driven Search campaigns. And we have now SMBs that can reach customers at a scale that really wasn't possible even a few years ago. You can add in Google Translate and so on.<\/p>\n

So I feel if you factor all of this in, we are in a pretty good place and are quite excited about where this is going. <\/p>\n

Operator: <\/strong>Your next question comes from Ron Josey with Citi. Your line is now open.<\/p>\n

Ron Josey (Citi): <\/strong>Great. Thanks for taking the question. Maybe this one is for Anat. <\/p>\n

With margins continuing to expand here, I wanted to understand maybe, if you can break down the cost drivers or really the drivers of margin expansion, particularly amongst Cloud.<\/p>\n

There's a thesis out there that AI revenues are a lower margin, in general, but we are seeing margins improve. So more insights on just the Cloud business and what's driving that margin expansion. Obviously, demand, maybe pricing, but that would be helpful. Thank you.<\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Sure. Let me help unpack the margin expansion. Obviously, we're pleased to see that. <\/p>\n

There are pushes and pulls across the business, including within Cloud specifically. And I would start with the top line. When we see this robust, strong revenue growth, both in Cloud and Google Services, it does provide leverage all the way down to the bottom line within the income statement. <\/p>\n

And you know we've been working hard to ensure we're running a productive and efficient organization. And it's not just how we operate the business, but even in areas such as our technical infrastructure, where we are investing these significant CapEx investments into our data centers and servers, we are looking at how we drive scientific process innovation within that organization. And that is reflected both in Cloud and Google Services as we allocate cost based on consumption.<\/p>\n

In the past, I did talk about the depreciation associated with these investments that is hitting both Google Cloud and Google Services.<\/p>\n

Google Cloud expanded margin quite significantly from a year ago, as you've seen in our numbers that we've just previewed. And a lot of it, again, is the topline growth that Google Cloud is providing or producing, as well as an incredibly efficient way of running the business. <\/p>\n

I will give Thomas and that team a lot of credit for running a very productive organization and making sure that we are supporting our customers and providing those services and products that they want and benefit from, continue to drive topline growth, and doing this well within the middle of the income statement, all the way from very efficient technical infrastructure, thinking through how do we leverage AI across our business. <\/p>\n

Sundar mentioned the use of coding internally, how Gemini helps us there, optimizing our real estate footprint. And we're going to continue to do this. We're not going to stop here. We're going to continue to push for more efficiency, knowing that we're going to have the headwind associated with the depreciation coming with a higher CapEx level. <\/p>\n

Ron Josey (Citi): <\/strong>Thank you. Very helpful.<\/p>\n

Operator: <\/strong>Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>\n

Ken Gawrelski (Wells Fargo): <\/strong>Thank you very much. Two, if I may, please.<\/p>\n

First, on the Cloud and capacity, could you speak about how your verticalized capabilities enable you to navigate a complicated supply chain, especially one experiencing inflation and constraints? Are you factoring any supply chain price inflation into '26 and '27 CapEx commentary?<\/p>\n

As part of that, maybe Anat, could you update us on the allocation of compute capacity, internal versus external Cloud?<\/p>\n

Then one more, please. When you think about Search query volume growth, we're clearly seeing expanding use cases. Historically, it's always been free to the consumer and completely ad supported. <\/p>\n

Do you see future use cases where certain consumer use cases are more effectively monetized via Subscriptions, and maybe a different mix of the consumer, quote unquote, the new Search opportunity? Thank you.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Alright Ken, <\/strong>there are a few parts to it. Maybe I'll touch on it. <\/p>\n

On overall compute, I think I spoke earlier on how we think about allocation of compute across our businesses. I think, again, the long range planning and the ROIC frameworks give us a good way to plan ahead.<\/p>\n

Obviously, we are working through a complicated supply chain environment, as you point out, and we're factoring that into any commentary we give. <\/p>\n

But I think the scale at which we are operating and our ability to work across all layers. Our supply chain partners see the strength of our diversified businesses and the demand we drive, and our frontier technology and the investments all through the stack. I think they help us get into deeper partnerships all across the supply chain. And I mentioned earlier the economies of scale point as well.<\/p>\n

So all of that factors in a positive way there, I think.<\/p>\n

In terms of Search, look, I think we are proud that we've built models that, we are at the frontier, across the Pareto frontier. We do think about capability and the cost frontier deeply, so that we can serve users at scale. But at the same time we can bring in the most powerful models for the most demanding queries.<\/p>\n

But the future, you are right, that as we serve more and more valuable use cases, there are going to be use cases where people will want to use the most powerful model, and there may be different ways to accomplish that.<\/p>\n

So we're going to put the user first and support them in the way that they want to use the product. And we are already providing various tiers of our subscription plans in which you can get access to more powerful models, and that applies across your Google user experience, including in Search. <\/p>\n

You've seen the momentum. We saw a very robust quarter in terms of our AI Subscriptions growth, driven by interest in getting access to better Gemini models. And so I think that sets us up well to serve the breadth of use cases people would want in all places, including Search. <\/p>\n

Ken Gawrelski (Wells Fargo): <\/strong>Thank you.<\/p>\n

Operator: <\/strong>And our last question comes from Justin Post with Bank of America. Your line is now open.<\/p>\n

Justin Post (BAML): <\/strong>Thank you for taking my question. I expect a lot of interest in your TPU sales. Can you help us think about how you're thinking about the opportunity there? And then maybe break down the backlog growth a little bit between TPUs and Cloud.<\/p>\n

And then the second question. Just thinking about the margins on these big, generative AI Cloud deals, how do you think about these $100 billion deals coming in and the margins associated with those? Can they be similar to your Cloud business as it is? Thank you. <\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Look, overall, I would say we see tremendous interest and there's tremendous demand for both AI solutions, as well as AI infrastructure, including massive interest in our GPU offerings, as well as our TPUs. So we are proud that we can provide customers with the breadth of our offerings and meet them in terms of where their needs are.<\/p>\n

And maybe I'll pass it to Anat to give some color on the backlog growth.<\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>So the backlog, the TPU hardware agreements that Sundar referenced in his prepared remarks are reflected in our Cloud backlog, the $462 billion, although the majority of the backlog is still GCP agreements.<\/p>\n

Now, as you think about the total backlog, just over half of it will convert to revenue in the next 24 months. And the TPU hardware sales, more specifically, we expect a small percent of them to see coming through as revenue later this year, and then the majority to be realized as revenue in 2027. <\/p>\n

Justin Post (BAML): <\/strong>And then anything on the big AI deal margins with the generative AI companies?<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>I think nothing to comment on any specific contracts, but overall, earlier, there were a lot of questions about how do we allocate. And remember, in a constrained environment, when we're choosing to allocate across all these opportunities, we are working off a robust ROIC framework. <\/p>\n

Justin Post (BAML): <\/strong>Great. Thank you. <\/p>\n

Operator: <\/strong>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. <\/p>\n

Jim Friedland, Head of Investor Relations: <\/strong>Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2026 call. Thank you, and have a good evening. <\/p>\n

Operator: <\/strong>Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect. <\/p>","DocumentFileSize":"148 KB","DocumentFileType":"PDF","DocumentPath":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/Apr\/29\/Alphabet-2026_Q1_Earnings_Transcript.pdf","EventId":1047,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"00000000-0000-0000-0000-000000000000","GlobalTimeZoneId":10,"IsWebcast":false,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2026\/2026-Q1-Earnings-Call-2026-nW8kCrBAKS\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"00000000-0000-0000-0000-000000000000","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"","ReportYear":"","RevisionNumber":44772,"SeoName":"2026-Q1-Earnings-Call-2026-nW8kCrBAKS","TagsList":null,"TimeZone":"PT","Title":"2026 Q1 Earnings Call","WebCastLink":"","WorkflowId":"abdfff83-c76f-42c1-9f01-ce807c889f63","EndDate":"04\/29\/2026 14:30:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"04\/29\/2026 13:30:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"file","Extension":"PDF","Size":"206 KB","Title":"Transcript","Type":"Document","Url":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/May\/14\/Neal-Mohan-MoffettNathanson-Transcript-05-14-26.pdf"}],"Body":"

This preliminary transcript is provided for the convenience of investors only, for a full recording please see the MoffettNathanson Media, Internet, and Communications Conference <\/em>webcast<\/em><\/a>. <\/em><\/p>\n

Michael Nathanson (MoffettNathanson):<\/strong> Okay, everyone. We're going to get started. Okay, ready? This is going -- let me start with the Safe Harbor, Neal. So some of the comments Mr. Mohan may make today could be considered forward looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to Alphabet's Form 10-K and 10-Q including the risk factors. Any forward-looking statements that Mr. Mohan makes are based on assumptions as of today, Alphabet undertakes no obligations to update them.

Neal, thank you for being here.

Neal Mohan, CEO of YouTube:<\/strong> Thank you. Thanks for having me.

Michael Nathanson (MoffettNathanson):<\/strong> I know you guys are excited about that. Let me tell you about Neal before we get going. CEO of YouTube. His focus is on empowering creators, fostering community, and driving the future of video. Prior to becoming CEO in 2023, he served as YouTube's Chief Product Officer. Before joining YouTube, Neal was a pioneer in digital advertising, first leading product development and strategy at DoubleClick and then as Senior Vice President of Display and Video Advertising at Google.

Neal holds a Degree of Electrical Engineering from Stanford and an MBA from Stanford as well. Last year he was named \"Time Magazine's\" CEO of the Year. Congratulations on that.

Neal Mohan, CEO of YouTube:<\/strong> Thank you.

Michael Nathanson (MoffettNathanson):<\/strong> This is Neal's third appearance in the past four years and we are honored to have him. So, congrats on being named CEO of the Year by \"Time.\" In that article you were quoted as saying the entire dynamics of the media industry are changing before our very eyes. It's incredibly disruptive. And if you don't adapt, you can be left by the wayside.

So now all of us in this room are quite familiar and well versed about that disruption. But can you talk about some of the biggest adaptations that you've made in the past years since you last graced our stage?

Neal Mohan, CEO of YouTube:<\/strong> Yeah. First of all, thank you for having me. It's a privilege to be here. Nice to see some familiar faces in the audience as well. I'll start by maybe just a little bit of big picture, because I think that sets the context for the rest of our conversation which is as you point out, it is an incredibly dynamic time in the industry. Lots of aspects of it are changing, driven by all of us as consumers and viewers of media.

And so for us or at least for me, it's helpful that there's lots of consistency to our strategy. And so in terms of context, I'll say a little bit of what I shared last year, because the most important thing is our strategy remains the same. Which is at YouTube, we have this flywheel and it always starts with our creators. That, I believe, is a unique proposition about YouTube.

Creators, YouTubers, call YouTube their home. That's differentiated from social media. It's differentiated from streaming and TV. And so everything starts with that. Our adaptation there is to keep pace with what these creators want to do from a business standpoint in terms of creation tools. In terms of, you know, expanding their audiences, connecting them with new audiences all over the world.

For example, eliminating in many ways the only barrier that exists between a creator and their fans in the world - which is language, through things like AI-powered, you know, multi-audio dubbing. Right? Multi-track audio.

So creators are the core piece, but that's what attracts the 2 billion viewers that come to YouTube every day across all screens, across Living Room, Mobile, Desktop. Living Room in the U.S. gets 200 million hours of watch time every single day. And so viewers are really important.

And then ultimately, obviously, that's what attracts the monetization, we are primarily an AVOD business but a third of our business is now SVOD, subscriptions. That is also an area that is very ripe for innovation. A lot of it AI-powered, which we can talk about.

So that's the broad flywheel. Creators, viewers, and monetization. And what's accelerated it - what's changed about it in the last year is it's just accelerated. I think a lot of that is through our efforts. I'll just give you two examples.

The first is we talk about our creators. Many of you heard me talk about creators, YouTubers. Those are the core strength of YouTube. It's interesting to me especially in the last 12 months how many non-endemic creators, people who come from other parts of the media industry whether they are athletes. At our Brandcast event last night we had Dwyane Wade and Draymond Green talking about their channels on YouTube. Whether Trevor Noah or Oprah, all of them wanting to become YouTubers. So that's a big sort of trend in the last few months. I think accelerates this flywheel.

The other piece is going in the other direction which is if you are a YouTuber, it opens up a whole plethora of opportunities for you. One of my favorite examples, everybody knows about MrBeast, but one of my favorite examples is Markiplier. Mark built a movie. He self-funded it. He led his millions and million of subscribers on YouTube through that journey over the last several years and then released it in theaters.

He thought it was an independent production, so maybe it would be in two or three theaters. Maybe 50 theaters. Because of his YouTuber follower base, it opened to thousands of theaters and was the number-one-grossing movie on the weekend it was released.

And so that trend, those trends of creators really sort of being these businesses and other folks wanting to become creators really accelerates that flywheel. That is a trend we've seen in the last 12 months.

Michael Nathanson (MoffettNathanson):<\/strong> I was going to say to you, when I think about our own coverage here at MoffettNathanson, it feels to us in the past couple years, it's striking to see the traditional media world now waking up to YouTube and the power of YouTube. And I know you've had Brandcast for the past seven or eight years.

You've been at YouTube for a while, what were the early bets and innovations that you thought would pay off; right? When you go back to this crazy idea called YouTube, now it's what it is. But what attracted you to it as a business model?

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I think one of the nice things at YouTube and being part of the Alphabet family is we can make long-term bets. And whether it's, you know, investing in AI alongside our sister company in Google DeepMind. But I'll just give you some examples of those. 

One of the longest bets we made and people thought was crazy at the time was investing in our subscriptions business. Today YouTube Music and Premium has as of last year over 125 million subscribers. You know, YouTube TV is what it is. And when we were making those bets, people were like why would people pay? You already offer all of this for free.

And it turns out that if you add user value whether it's interruption-free, downloads, background, or building more features on top of it, users see value in that and that's why we built that business. So that was a bet we made a really long time ago. 

Fast forward to today, this last quarter, we added the most non-trial subscribers ever in the history of Premium globally but also in the U.S. So that was a really big bet we invested in. Another one which I talk a lot about, because it was also kind of one of those overnight successes that turns out was many, many years in the making is YouTube in the Living Room. [The primary device for] watch time of YouTube happens on TV screens in the U.S*.

We saw those early trends actually well before COVID. Obviously accelerated in COVID and kind of continued, but that was a bet even before COVID. And it required an enormous amount of technological innovation, because the television market, unlike mobile, is very heterogeneous. All kinds of OEMs, etc.

We had to make the video feel cinematic: 4K, 8K. We had to invest in episodic content. Podcasts is another one where it turns out that actually hosting podcasts and betting on people wanting to watch, not just listen turned out to be a big bet. And we are now the number-one podcast platform globally.

And so those are some examples of how we identify trends and then we invest in them heavily, forward invest for many years in many cases before they end up producing returns. And, you know, they've led to the successful position we are in now in Living Room, podcasts, et cetera.

Michael Nathanson (MoffettNathanson):<\/strong> You segued to my next question which is we know YouTube is more than $60 billion of revenue. We know it is the biggest media company in the world. You talk about subscriptions. It's growing faster, probably twice as fast as advertising. Right?

So can you talk a bit about the products that drive that? Any surprises in the learnings? I know you made a bet on subscriptions, but it's growing at literally high teens rates based on our work.

Neal Mohan, CEO of YouTube:<\/strong> Yeah. As you know, Michael, we have two subscription businesses. We have YouTube Music and Premium. That's the 125 million+ subscribers. And then we have YouTube TV. And I would say that the strategic insights or the product insights are similar in both of them.

The first and, you know, probably the most important is just product innovation. So we've invested very heavily. Hopefully many of you are subscribers in the YouTube TV experience. Right? Things like multiview, things like key plays. Really leaning into if we're fans of that media, how would we want to consume that type of content?

So product innovation is one. I already talked about how we thought about that with YouTube Music and Premium. But the second is actually giving real consumer choice. So the fact we offer a paid subscription that comes with a particular set of features and content, that in and of itself is a way of giving consumers choice. But we've really leaned into that.

So for example, with Premium, we now have a SKU that's, below that, called Premium Lite. And Premium Lite is a way for people to pick the SKU that works best for their wallets but also for the value they're looking to get out of it.

We just launched on YouTube TV ten different tiers. Sports bundle, Sports plus News, Entertainment, et cetera. Again to just give broader consumer choice. And I view that as TAM expanding, opportunity expanding, delivering value for viewers. And those have been the two most salient insights in terms of how we've been able to grow the subscription business.

Michael Nathanson (MoffettNathanson):<\/strong> I want to come back to the bundles and the packs with YouTube TV. But I want to talk to you first about pricing. Because I think for the first time in three years, you increased pricing on YouTube Premium. I can tell you my YouTube bill for TV is higher now than it was three or four years ago. So talk about what's driving those price increases and what gives you confidence there's not consumer pushback and churn doesn't increase.

Neal Mohan, CEO of YouTube:<\/strong> You're right. It's the first time in three years we raised prices on Premium just a few weeks ago. First and foremost is what I said which is we look at making sure we're delivering real user value. There's multiple ways of doing that. Obviously acquisition and churn is one way, sort of, kind of a hard metric way of doing it. We survey our users pretty regularly. We keep getting that feedback.

So if you're not delivering that value, you don't have a right to raise prices. That's the biggest thing. These are businesses where we also have to make sure that we are fair to our partners. You know, it costs money to put this content in front of our users, our SVOD businesses have a professional content provider aspect to them. Whether it's the traditional media company partners, whether it's the music labels.

And so we pay them for our subscribers. And so -- all of that goes into the consideration. You know, I think the most important thing is that we all as consumers get to vote with our feet, so to speak. Despite the price increases over the years, our business has continued to grow. As I said, this was our strongest quarter ever in Q1.

So that to me at least is an indicator that our viewers who have lots and lots of choice see a lot of value in our subscription products.

Michael Nathanson (MoffettNathanson):<\/strong> What's great about having you here is there's been a ton of discussion at this conference about AI and the dream of AI. You're actually using AI. You've been using it for a while. Can you talk about how you're using AI across your creator market, ad market, consumer market and where you are in that journey. How would you measure where you are today and what are the things you're dreaming of the next couple years?

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I do think that YouTube has this very sort of unique vantage point when it comes to this AI sort of revolution that we're in. On the one hand, we are working with the most cutting-edge technology, the deepest technology, inventing it at YouTube, working as I said very closely with DeepMind on a daily basis.

And so we're exposed to that depth of technology and how fast it's moving. But we also face the creative industry, the media industries every single day. So the way I think about AI and how it is transforming or really empowering the YouTube businesses, really empowering human creativity.

And I'll go back to the flywheel that I talked about. For us, AI is first and foremost about making our creators' jobs easier and more effective. And so the most obvious place where you see it in the YouTube product is when you open up the app and you hit that plus button. A lot of the creation tools that exist there are powered by Gemini, Veo, all of our investments in AI models.

And so now, you know, if you are watching a YouTube Short and you want to insert yourself in it, you can do that through AI. And that might have been something you were able to do, sort of kludge together, might have taken a few days. Now it happens in less than a minute; right?

And so what that does is it makes creators free to go and do other things that they otherwise wouldn't have been able to do. And it also expands the pool of creators. And so that's on the creation side. Viewers, I think it's about two things. One is using AI to continually improve the power of YouTube recommendations. Hopefully this is something that you all experience, an improvement literally on a monthly basis. And that is a deep investment in Gemini and making it so that there's a much deeper understanding of all of us as viewers when you open up the app that makes the recommendations better.

And then from a monetization standpoint, it's really about making it so that we can deliver ROI for advertisers. Whether it's being able to generate creative using AI that they can put in Shorts or in YouTube traditional long form. Whether it's about better optimizing their campaigns that run on YouTube.

And so it really is every aspect of the flywheel. I could go on and on. There's so many parts.

Michael Nathanson (MoffettNathanson):<\/strong> Of the three markets you serve, where do you think you're the furthest along, where you see the most tangible benefits from rolling these tools out today?

Neal Mohan, CEO of YouTube:<\/strong> I think it's across all of these. The creation tools have been in the product for I'd say now a couple years. Every week, every month we're adding new capabilities there. One aspect that every time I talk to creators that I hear about is not just these creation tools around videos, but how do we make the whole creative journey easier.

So I was with a creator at our Brandcast event last night and she was telling me how much she loves a product called Ask Studio. That's when you go into YouTube Studio which is the product that creators use to manage their videos on YouTube. And instead of going and maybe asking for a particular report or a slice of data, you can just Ask Studio and it literally will give you deep insights in terms of trends on your videos, on your channel, what have you.

And now there's infinite pieces of insights that you can get out of something that you previously would have just -- it would have taken you days or weeks to actually pull that insight using all the reporting that we had. Now it happens instantaneously.

And so I'm very proud of how far we've moved the ball from a creator standpoint. We have a feature called Ask on the viewer side. So if you watch a YouTube video on your phone or desktop, you might notice that Ask button below the video, that's a way for you to interact much more deeply with the video itself.

So if you're listening to a new Justin Bieber song or video, well, you can ask where those lyrics come from. How do we think about that? It's just a deeper connection between viewers and creators and just in April that had 75 million users using it on a regular basis. So those are just some examples of how you see it in the core YouTube experience, enhancing it.

So it's really all of these pieces are being accelerated. Every month you see new capabilities getting layered on.

Michael Nathanson (MoffettNathanson):<\/strong> Right. And are things developing faster than you thought? Are you being blown away by things you're seeing on the creator side?

Neal Mohan, CEO of YouTube:<\/strong> I mean, I think every time you put a new set of capabilities in front of creators, it is really amazing how quickly they adopt them. And it's really amazing what new types of formats and creativity it produces. And given how fast the underlying AI technology is developing especially at Google, it's no surprise you're seeing that in terms of how creators are using these features.

Michael Nathanson (MoffettNathanson):<\/strong> Let me ask you some questions we get from covering other industries. So we cover the music industry. A question we get a lot is can you talk a bit about how you view the impact of AI-created content consumer behavior when it comes to music. How do you think that develops?

Neal Mohan, CEO of YouTube:<\/strong> Well, there's two aspects of it. One is on the actual creation side. And music, you know, for decades -- and I've been in the music industry for a very long time. Artists adopt new technology; right? The drum machine back in the '80s or new ways to actually produce new sounds. They incorporate that into their creativity, into their craft.

And so that's one aspect where you're seeing that in the music industry. Again, it is a tool to empower the human creativity as opposed to a replacement, in my view. And so that's one piece. We partner very closely with our music partners in that regard. Whether they're the labels, artists directly themselves.

The other piece is that my guess was that when it came to AI and the media industry, music would actually be one of the places that would be impacted first and perhaps most profoundly at least early on. And so one of the things that we did was I went to all of our label partners and tried to come up with these set of principles how we would innovate here. And the first principle was, you know, the industry couldn't bury its head in the sand. It had to be bold in terms of adopting these technologies, because they were coming.

But then also, we had to do it in a way that was responsible to the artist, to their fans, et cetera. And so to give you a flavor of that, one of the pieces of technology that we've worked on a lot in the AI realm is something called Likeness Detection. And so those of you familiar with YouTube, you'll know that one of the foundational pieces of the entire creator economy is a technology called Content ID.

And Content ID is about giving rights holders the ability to have their content -- it's actually one of the earliest uses of AI at YouTube. Almost ten years ago, maybe longer. Where they have control over what comes down and how it gets monetized. So we're taking that same principle to the AI world with likeness detection.

And so if an artist's singing voice is generated, then that artist should have control over how it's used. Output control over it. And so that is a unique-to-YouTube-type capability and principle that we're bringing to the AI realm and music is one of the places where you'll see its adoption. Because now if you're an artist, you get to decide. Do I want to monetize that or do I want it removed?

Michael Nathanson (MoffettNathanson):<\/strong> Do you think there's a risk long-term that consumption -- consumers will start adopting more AI-created content over traditional recorded music? And you see -- you probably see the data from YouTube Music side of it.

Neal Mohan, CEO of YouTube:<\/strong> My belief is that a lot of music and why we all fall in love with music and why it's such a core part of the culture in our core memories through our life is because there's human stories behind them; right? Like two computers can play chess, but in order for us to be interested at least one of them has to be human; right?

And so I think the same thing applies in the music realm. It doesn't mean there won't be AI-generated music, that is part of this journey, but at least in my view I don't view it as a replacement.

Michael Nathanson (MoffettNathanson):<\/strong> Okay. I have to ask you about platform health and AI slop. As the technology develops, how do you prevent AI slop from really infesting the platform and hurting both the user experience and the creators' ability to connect and build community?

Neal Mohan, CEO of YouTube:<\/strong> Look. I mean, we talked about all of these amazing tools that are -- that AI will enable. And one of them -- one of the aspects of them is a lot more people can create. And the cost of producing videos for YouTube goes down dramatically. And that can lead to amazing content, but it can also lead to low-quality content.

And this notion of low-quality or spammy content has been, you know, a concept that has existed on platforms including YouTube for many, many years that we have dealt with effectively through our content policies, our trust and safety systems, but also our recommendation systems. The way that our recommendation systems on YouTube work is looking at a concept of long-term satisfaction.

So not just watch time in the near term, but are you satisfied over the long-term in terms of your YouTube experience? And that is a very, very effective tool at weeding out low-quality, spammy-type content in the process. And those same techniques are being applied to things like AI slop, low-quality AI-generated content.

I'm pleased with what we're seeing. It doesn't mean the challenge isn't going to be there, but it's my team's responsibility to remain on top of it so that it doesn't become something that you associate with your experience on YouTube. I'm confident it won't be, but that's sort of how -- that's how we approach it.

The other thing I'll say quickly on that, Michael, is it's also important to make sure that we don't overdo that. AI is also going to enable many new forms of creativity. And there are lots and lots of very many mainstream popular genres on YouTube today that might have seemed strange when they were first invented. Like the most canonical example is, you know, watching live streams of people playing Minecraft. Like, who would do that? Turns out that's an enormous vertical on YouTube.

Michael Nathanson (MoffettNathanson):<\/strong> I've asked that question.

Neal Mohan, CEO of YouTube:<\/strong> And it's created a culture that resulted in a $300 million grossing Minecraft movie last year. And so it's really important to make sure that we don't suppress those types of emerging forms of creativity that might have seemed strange at first.

And so we're always trying to strike that balance. But, you know, AI slop is not something that we -- you're going to see prevalence of on YouTube because of these techniques.

Michael Nathanson (MoffettNathanson):<\/strong> You've said it here today, you've said it throughout your whole time as a leader. You're really focused on the creator, the creator world. That's something you guys are truly supportive of. Seems like in the past couple years, a lot of your competitors have woken up to the power of the creator universe.

So what are you doing to ensure the creators on YouTube will continue to stay on YouTube? And can you talk a bit about the monetization opportunities that are on YouTube versus other platforms?

Neal Mohan, CEO of YouTube:<\/strong> Yeah. Again, it's so fitting that this is happening right after our annual Brandcast upfront last night. It was a celebration of creators. We talked about so many new projects that our creators are embarking on because of YouTube. Show after show after show, the audience excitement, the advertiser excitement was palpable.

And it goes back to the fact that when you speak with these creators, they tell you over and over that their home is on YouTube. And when their success on YouTube creates opportunities off of YouTube, I view that as the success of those creators on YouTube, but also YouTube's success.

Because of the audience that we have been able to build for them, the fandom that we've been able to build because of the monetization opportunities we give them on YouTube, it creates all these opportunities on YouTube but also off of it. And I think that contributes to the flywheel. And our creators tell us that. You know, our biggest creator did a show -- did \"Beast Games,\" MrBeast. You go into his offices, there's a sign that says the first rule of MrBeast is YouTube first. Because he knows that the fount of his success whether it's Feastables, whether it's \"Beast Games\" derives from his strategy and commitment on YouTube. And I see that across all of our creators. They tell me that over and over.

Now, it's nice -- it's amazing to see that other platforms have sort of identified YouTube creators as sort of the center of culture, and they are talking to them. But repeatedly -- and the one thing that's nice is our creators recognize they have this position of strength now and they can dictate the terms including -- having YouTube remain their home.

But, you know, some of the big things that really contribute to that are not just the audience that we build for them. But what we can do from a business standpoint. These are entrepreneurs. In the last four years, up to last year we paid out over $100 billion to the creator economy across all of our partners. That is an enormous investment in our creators.

We have 3 million creators in our YouTube Partner Program that monetize every single day. And we grow new forms of monetization all the time. We talk about AVOD and SVOD, but we also have direct fan funding models like channel memberships, like other -- like paid digital goods, gifting, et cetera that contribute to creators' revenue on our platform. And we're going to continue to invest in that.

Michael Nathanson (MoffettNathanson):<\/strong> Okay. Let me take you to Ads. You know well from even your days pre-YouTube, at DoubleClick, and then post DoubleClick again. Where do you see, is the biggest opportunity to drive better Ad growth at YouTube?

Neal Mohan, CEO of YouTube:<\/strong> I think -- the big picture is the reason why advertisers are interested in YouTube starts with, again, back to the flywheel. The creators and viewers that are there. When you go to YouTube, there is every type of format, every type of creative idea from on-demand to live. From 30-second Shorts to 15-hour live streams to everything in between. From watching a highlight clip for five minutes to two-hour podcasts about sports.

And so that's the essence of what actually makes it truly attractive to advertisers, because of that depth of content whether it's on the Living Room screen, whether it's on your mobile device is what gives advertisers every sort of use case. Meaning from the top of the funnel to the bottom conversion, you can do all of that on YouTube.

And that is something that our advertisers recognize. If you're a brand advertiser, you can build relevancy around your brand, build a story. And so just last night we had a great example from Coach. 85-year-old brand -- over 80-year-old brand. It was looking to recapture some of the relevancy around the brand, particularly around Gen Z and young users which of course are on YouTube.

And so they really leaned into creative storytelling on YouTube. It was a 60% increase in awareness. 600% -- six times increase in consideration. And a substantial increase in acquisition. And so every aspect of the funnel was hit by their YouTube strategy. And I think that is a unique differentiator of YouTube from all the other players whether it's social media on one end or kind of traditional linear TV and streaming on the other end.

The same thing applies to new opportunities like shopping. That's an area as you know that we're investing in heavily. So whether it's boosting creator content that already has links to -- affiliate links to your products. Whether it's turning a television screen, not just as a viewing medium but as a shopping medium but having things like purchase with Google Pay or QR codes.

Our job there is to create all of these new ad products that tap into the core aspect of YouTube which is every device, every type of format of content. And when I speak with advertisers and brands, that's what really resonates with them over the long run.

Michael Nathanson (MoffettNathanson):<\/strong> So over the past 12 months YouTube has decelerated as Search has accelerated. Can you talk about the factors that may be causing kind of the change in the growth rate from where it was 12 months ago?

Neal Mohan, CEO of YouTube:<\/strong> Yeah. Again, I think the way we look at it is ultimately all of the ad products that we build whether it's the AI conversation we were having, whether that empowers new creative types, new forms of optimization, it's about ROI to our advertisers and that sort of ultimately is what grows the Google Ad business. Of which YouTube also benefits. Not just Search over the long run.

And so that's really the best way to look at it. And that's what you should expect not just from YouTube but from Google overall in terms of how we look at it which is ultimately what is in the best interest of our advertisers. What are they telling us? They care about ROI on the performance side. Brand advertisers also have their success metrics that they measure in ROI terms. It's not just about views or reach, it's about how you actually hit those goals of awareness or consideration that I described in the Coach case.

And that's how you should expect Google to look at that.

Michael Nathanson (MoffettNathanson):<\/strong> Can I ask you about live events? YouTube had an NFL game last year. You have the Oscars coming in 2029. What is your appetite for continuing premium events and putting in front of your paywall and importantly how does the conversation change with rights holders as you've added some of these premium events?

Neal Mohan, CEO of YouTube:<\/strong> I think the best way to think about it -- again, just to give you some inside framework on this -- is it's really about live events as you said. YouTube is a place, we really are the epicenter of culture. Not just because of what the creators are doing every day. But also because of these big tentpole moments that exist and live is a way -- is one of the few mechanisms of true water cooler moments and the place where that happens is on YouTube. <\/p>\n


Whether it was the Artemis launch. I'm guessing most people watched it, if you watched it live, on their YouTube channel. Whether it's Coachella which was this -- you know, it was happening at 3:00 in the morning on the east coast time when Justin Bieber was on stage, yet it became the world's biggest cultural moment. His vibe session in terms of his YouTube history.

And especially if you're a young person; right? That was the culture for a week or two. And so we see that in the data all the time. Live is a big driver of that. And that's kind of one of the theses behind our investment. Whether it's sports as you mentioned, the Oscars because they are these cultural moments and they get amplified when they're on YouTube because of all the fandom that happens around them that shows up in Shorts or other forms of long-form VOD content.

And so -- and we look at -- I look at it sort of three lens. Can we -- by having it on YouTube, is there a chance to expand the opportunity? So in the context of Sunday Ticket, that was, well you don't need a guy to install a dish on your house. You can get it with two taps. That's TAM expanding; right? You don't need it to be tied to another subscription; right? That's one piece.

The second is, can YouTube bring some real technological innovation? So Multiview; right? Multiview is a great example on the YouTube TV side on the sports. Well, guess what? One of the ways people consume Coachella the most is Multiview, because Coachella is this concert that's across multiple stages. Wouldn't it be great if you could see four stages at once?

And then the third piece is our Creators. Can they enhance that viewing experience? And so you saw that in the context of the NFL. You should expect to see that in the context of something like the Oscars.

Michael Nathanson (MoffettNathanson):<\/strong> Cool. Connected TV. We touched on it before. The growth from connected TV has been amazing. You now tower over the number two company Netflix. We get a question about what type of content is driving this consumption trend? And talk a bit about the demographics. Because the data, older viewers like myself are growing faster than even younger viewers.

Can you give us under the hood on CTV, what are you seeing?

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I think -- so there's over a billion hours of watch time every single day on living room devices on YouTube globally. 200 million in the U.S. There's -- there are billions of hours of YouTube -- I mean of Shorts watch time over the course of a month in the Living Room.

So at that scale, from a demographic standpoint, it's really all demographics. Otherwise you're not at those types of numbers. In terms of what's driving it, I think it's back to what I said, which is, can we create an experience that really allows this content to shine? And most of the content that is consumed on YouTube on Living Room are from our creators, from YouTubers. That is the reality, because that's what viewers, especially young viewers, want to watch.

So when they're turning on the TV, they're turning on YouTube and it's their YouTube experience that they're getting. And so that's probably the most fundamental sort of profound thing that I would say about Living Room growth. I think that's an area that's -- that has lots of future opportunities.

Michael Nathanson (MoffettNathanson):<\/strong> And demographically in terms of the mix?

Neal Mohan, CEO of YouTube:<\/strong> I think it's across the board.

Michael Nathanson (MoffettNathanson):<\/strong> Okay. Got it. We have time for a couple more. Let me ask about Shorts. It looks like Meta reels are driving revenue pretty aggressively. Some of that could be allowed also in reels, but to what extent can Shorts drive further monetization for YouTube? Last year you broke the news that YouTube Shorts was monetizing.

Neal Mohan, CEO of YouTube:<\/strong> Right here.

Michael Nathanson (MoffettNathanson):<\/strong> Exactly, so why don't you break some more news. But what do you see now in terms of the ability to monetize Shorts and where does it go from here?

Neal Mohan, CEO of YouTube:<\/strong> Yeah. First and foremost, the way we think about Shorts is it's another creative format for our creators. It's another way for all of us as viewers to enjoy their YouTube experience. It is a mobile-first experience. Although, you know, one of the fastest growing places for Shorts is on the Living Room screen, believe it or not.

And so that's what you should continue to see -- that's what you should expect us to continue to invest in is the viewer and creator experience. In my view and I've been in the ad business for a long time, the advertising opportunities really stem from that. The nice thing about Shorts is that you can come up with formats that are less interruptive in the feed; right?

And that is what you have hopefully seen in your own Shorts experience. You can even have formats like stickers. I was speaking about shopping as a growth opportunity on YouTube. We have shopping stickers on Shorts that allow for product placement and driving shopping that way. And that's seeing lots of success. We have over 500,000 creators that have tagged their videos with shopping.

So in terms of the RPM trends that you were talking about, we have -- we've reached parity not just in the U.S. but in several countries. In some countries we've even exceeded it including the U.S. So that's just a continued investment really in that full flywheel. I would really encourage folks to not just think about it from an advertising standpoint in isolation. It really is about delivering creator and viewer value first.

Michael Nathanson (MoffettNathanson):<\/strong> So my last question, it would not be a MoffettNathanson Conference if I didn't ask about YouTube TV and the changes you brought to linear bundle television. I thank you. You know I'm a big user. You announced ten specialized plans. What has been the consumer response to those plans? We would have hoped that the sports\/news bundle would have been cheaper versus the big bundle. I was looking for a discount here on the sports and news.

So talk to us about consumer adoption on that plan and maybe the hopes longer term to find more efficiencies.

Neal Mohan, CEO of YouTube:<\/strong> Yeah. I mean, look. It goes back to what I said earlier about giving consumer choice. That was our vision with YouTube TV when it first started. And then these tiers that we introduced really are about just giving more choice at various price points. Lots of customers of YouTube TV are sports fans. Could we give them a tier that's sort of close to that? But lots of them are also not sports fans and do we have offerings for them too?

It's really only been launched for a couple months now. So it's still really early, probably too early to say anything concrete about it. But it's our vision of actually giving more consumer choice. And I don't really think about it in terms of bundling or not, aggregation or not. For me it's really about consumer choice. You're describing an experience in YouTube TV. On YouTube, the main app, we also try to replicate that with things like prime time channels alongside the endemic YouTube content and creators you're watching.

Michael Nathanson (MoffettNathanson):<\/strong> Do you think we'll get to a place where we get all our content that we subscribe to at YouTube TV; right? It still bothers me to go in and out of YouTube TV to get games here and there.

Neal Mohan, CEO of YouTube:<\/strong> You mean going to other apps?

Michael Nathanson (MoffettNathanson):<\/strong> Yeah. I'd love to have a super aggregator of all my premium content in one place.

Neal Mohan, CEO of YouTube:<\/strong> I think one of the strengths of YouTube is like I said. You can get everything from your 15-second Shorts from your favorite creators to 15-hour live streams to, you know, 3-hour NFL games and everything in between. That is the vision. That is an intentional vision. A lot of our investment goes towards that.

When we see pockets of content that are missing, we innovate. That's where YouTube TV came from. Linear, live sports, live news, et cetera. That's where prime time channels came from. Could you get your professionally produced traditional content alongside your creator content? That's our vision. That's our approach. We have many, many prime time channel partners now. We're in a handful of countries. We want to roll that out to more countries.

And so that's sort of how we think about solving that particular consumer pain point.

Michael Nathanson (MoffettNathanson):<\/strong> Neal, thanks for being here. Congratulations on the success. We appreciate it. 

Neal Mohan, CEO of YouTube:<\/strong> Thank you, everybody.


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This transcript is provided for the convenience of investors only, for a full recording please see the <\/em>Q2 2026 Earnings Call webcast<\/em><\/a>.<\/em><\/p>\n

Operator: <\/strong>Welcome, everyone. Thank you for standing by for the Alphabet Second Quarter 2026 Earnings Conference Call.<\/p>\n

At this time, all participants are in listen‑only mode. After the speaker presentations, there will be a question‑and‑answer session. To ask a question during the session, you will need to press *1 on your telephone.<\/p>\n

I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. Please go ahead.<\/p>\n

Jim Friedland, Head of Investor Relations: <\/strong>Thank you.<\/p>\n

Good afternoon, everyone, and welcome to Alphabet's Second Quarter 2026 earnings conference call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi.<\/p>\n

Now I'll quickly cover the Safe Harbor.<\/p>\n

Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward‑looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10‑K and 10‑Q, including the risk factors. We undertake no obligation to update any forward‑looking statement.<\/p>\n

During this call, we will present both GAAP and non‑GAAP financial measures. A reconciliation of non‑GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz\/investor.<\/p>\n

Our comments will be on year‑over‑year comparisons unless we state otherwise.<\/p>\n

And now I'll turn the call over to Sundar.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Hi, everyone. Thanks for joining us. We have exciting momentum.<\/p>\n

Alphabet revenue grew 24% year‑over‑year. Our AI investments are redefining what's possible across every part of our business.<\/p>\n

Our momentum starts with Search, where people are adopting one seamless search experience across AI Overviews and AI Mode. We saw 17% revenue growth in Search & Other, and YouTube Ads grew 13%.<\/p>\n

Cloud revenue grew 82%, powered by strong demand for AI infrastructure and AI solutions. And Cloud backlog grew to $514 billion. It's great to see the wide adoption of Gemini Enterprise, with nearly 90% of the Fortune 100 using it.<\/p>\n

Today, I'll expand on our AI progress, our global product footprint led by Search and YouTube, Google Cloud's leadership, and our long‑term Bets.<\/p>\n

First, AI.<\/p>\n

Yesterday we announced new models ‑‑ Gemini 3.6 Flash and Gemini 3.5 Flash‑Lite ‑‑ which are cost effective and highly efficient. We're seeing tons of demand for our workhorse Gemini Flash series because it hits the sweet spot of performance and cost.<\/p>\n

We also launched Gemini 3.5 Flash Cyber, which I'm really excited about. Paired with our CodeMender agent, it finds and fixes vulnerabilities and delivers performance at the frontier, comparable to far bigger cyber models.<\/p>\n

Gemini 3.5 Pro is currently in testing, and our team is already building the next generation of models. We have started our most ambitious pre‑training run yet for Gemini 4 and are excited by the progress we are seeing at the frontier.<\/p>\n

Demand for our models is translating to strong token usage across developers and enterprise customers, and we continue to be supply constrained, a sign of momentum and rapid adoption.<\/p>\n

More than nine million developers are building each month with our models across our APIs and key developer products.<\/p>\n

Our model APIs are now processing approximately 22 billion tokens per minute. That's up from 16 billion just a quarter ago.<\/p>\n

Additionally, this quarter, we launched Omni. It allows users to create anything from any input, starting with video. Since launching at I\/O in May, there's been a 40% increase in daily active users creating videos on the Gemini App.<\/p>\n

Our Gemma family of open models, small enough to run on local devices, are hugely popular. These models have been downloaded over 900 million times.<\/p>\n

And our latest Gemma 4 models have been downloaded over 300 million times since launching in April.<\/p>\n

Our agentic development platform Antigravity allows anyone to build in the agent‑first era. It has more than 2.4 million weekly active users. Antigravity is a powerful tool for users and enterprises, and it's completely accelerated how we build internally. As just one example, a team in Chrome is now on track to accelerate delivery by eight times, compressing a two‑year timeline into three months through model‑driven refactoring.<\/p>\n

Moving on to our global product footprint, which brings AI to more people than any other company.<\/p>\n

Starting with Search. AI continues to drive an expansionary moment, with new experiences resonating with users and driving growth in queries. As a big football fan, I was particularly excited to see Search usage hit an all‑time high during the World Cup this year. This really highlights how much people turn to Google in moments that matter.<\/p>\n

We continue to make Search more helpful and intuitive. We recently brought together AI Overviews and AI Mode into one seamless Search experience that combines our frontier capabilities with the best of the web. And we're continuing to incorporate more frontier capabilities into Search with agents, personal intelligence and notebooks.<\/p>\n

Our AI‑powered features are driving increased Search usage. Since expanding AI Mode globally last October, we've surpassed one billion monthly active users. And just like AI Overviews, AI Mode is driving an incremental increase in Search queries overall, and we're now sending billions of clicks to websites every week through AI features in Search.<\/p>\n

As we serve more of these queries, we have continued to drive efficiencies. Thanks to our engineering and hardware optimizations, this quarter we reduced the cost of AI Mode responses to its lowest level since launch, even as we have brought more advanced AI capabilities.<\/p>\n

Philipp will also talk more about how we are innovating the ads experience.<\/p>\n

Next, the Gemini App, which now has 950 million monthly active users, with daily active users tripling in the last year. Users love new agentic features like Daily Brief and our personalized agent, Gemini Spark, which is now available in the US and internationally. We've been shipping helpful new features like this at an incredible clip.<\/p>\n

On to YouTube. Month after month, when a big event happens in the world, the world turns to YouTube. It's been incredible to see that over 1.7 billion unique viewers globally watched World Cup‑related videos on YouTube during the FIFA World Cup 2026.<\/p>\n

We are also bringing the power of conversational AI directly into the YouTube experience. Ask YouTube uses our Gemini models to let people ask complex questions about individual videos, get quick takeaways, and jump straight to moments in those videos. The early engagement is encouraging. More than 140 million users engaged with Ask YouTube on the watch page in June 2026. And we're bringing that Ask experience to the wider search experience on YouTube.<\/p>\n

Next, Cloud. Our continued momentum is driven by our integrated AI portfolio consisting of chips, models, data, security, and agent platforms, all designed to work together. Gemini continues to be a key driver of growth, and is deeply integrated across all of our Cloud products, including Gemini Enterprise, Data Analytics, Cybersecurity, and Google Workspace.<\/p>\n

We are seeing strong, diversified demand across products, customers, geographies, and industries. Our product differentiation is driving expansion in three ways.<\/p>\n

We're winning new customers, more than doubling our acquisition velocity year‑over‑year.<\/p>\n

We're deepening our relationships with existing customers, who are expanding their usage and exceeding their commitments by more than 50%, also an acceleration over last quarter.<\/p>\n

We are driving growth with partners, with transactions on Google Cloud Marketplace growing over seven times year‑over‑year.<\/p>\n

One of the strongest parts of our growth comes from the rapid adoption of our Gemini Enterprise platform. It is differentiated with easy‑to‑use tools to build agents and automate processes, connectivity to enterprise systems, cost management and governance tools. In Q2, Agent Development Kit, our framework for building and deploying enterprise AI agents, reached nearly 70 million total downloads.<\/p>\n

As I said, nearly 90% of the Fortune 100 are using Gemini Enterprise. We have customers like PepsiCo for AI and analytics solutions, Intel to streamline core processes, HSBC for wealth management, Bell Canada for customer engagement, Macy's for commerce experiences, and SIGNAL IDUNA for knowledge management.<\/p>\n

More broadly, Gemini is transforming how millions of businesses use AI to build custom agents, automate processes, improve cybersecurity, manage customer relationships, streamline data analytics, collaborate effectively and more.<\/p>\n

All of this momentum is driving growth in our paid token usage. Nearly 500 Cloud customers have each processed more than one trillion tokens in the last year, and usage is so much deeper than that. Over the last 12 months, more than 2,000 enterprises consumed over 100 billion tokens.<\/p>\n

We are also seeing strong interest in our AI‑powered security platform, which is differentiated because it integrates threat intelligence, cyber‑response prioritization with Wiz, AI‑automated scanning, code remediation, and monitoring. Today, 90% of the Fortune 100 are Google Cloud Security users; nearly 90% of Wiz customers are using AI‑powered security features; and we have seen a more than 45% quarter‑over‑quarter increase in the number of AI workloads scanned and protected by our security platform.<\/p>\n

Our security tools are being used to protect critical infrastructure, including financial services organizations such as Morgan Stanley; telecommunication providers such as Tell‑us; healthcare organizations such as Texas Children's; software companies such as Atlassian; and several government agencies. And with our new Google AI Threat Defense, we are really excited to bring our new cyber model and CodeMender to help our customers defend against AI threats.<\/p>\n

All of this is powered by our leading AI infrastructure. We offer the industry's broadest range of accelerators from Google and NVIDIA, including the new NVIDIA Vera Rubin platform, and TPU 8t and 8i, which deliver strong price performance. On top of this, let me mention three unique offerings.<\/p>\n

First, our Virgo Network, which is designed to meet the needs of modern, large‑scale AI workloads. It allows customers to connect a million AI accelerators across multiple data center sites into a unified supercomputer.<\/p>\n

Second, our software stack has native support for JAX, PyTorch, vLLM, and SGLang -  enabling workload portability across GPUs and TPUs.<\/p>\n

And third, our new agent‑optimized Axion CPU provides 30% better performance per dollar compared to peer offerings.<\/p>\n

We are seeing strong growth in demand for our AI infrastructure offerings from leading labs such as Ineffable Intelligence, next‑generation AI builders including Kakao, financial services like Deutsche Börse Group, pharmaceutical companies such as Pfizer and Roche, and robotics and spatial intelligence companies such as World Labs.<\/p>\n

We are continuing our strategy of investing in promising companies and internal efforts that bring pioneering AI research into the real world. We've seen exciting progress from our Other Bets.<\/p>\n

Waymo introduced its newest vehicle, Ojai, to public riders. This is the first vehicle powered by the sixth‑generation Waymo Driver and will welcome more riders in the coming months.<\/p>\n

Wing has safely completed more than one million home deliveries, and we continue to grow our presence through partnerships with Walmart, DoorDash, and Papa Johns.<\/p>\n

In health and drug discovery, Isomorphic Labs raised over $2 billion to power its AI drug design engine, scale globally, and advance its drug candidate pipeline.<\/p>\n

It's truly been an extraordinary first half of 2026, with much more to come. Thanks to all of our employees and partners worldwide for their incredible work this quarter.<\/p>\n

With that, Philipp, over to you.<\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>Thanks, Sundar, and hello, everyone.<\/p>\n

I'll start with a review of Google Services, highlighting our momentum across Search, YouTube and Partnerships.<\/p>\n

Google Services revenues were $95 billion for the quarter, up 15% year‑on‑year, primarily driven by Search.<\/p>\n

Search & Other delivered 17% growth, with Retail and Finance driving the largest contributions.<\/p>\n

YouTube advertising revenues grew 13% driven by Direct Response and Brand.<\/p>\n

Network advertising revenues were down 1% year‑on‑year.<\/p>\n

Strong performance in Search and YouTube underscores how our investments in AI translate into measurable value for our users and advertisers.<\/p>\n

Starting with Search & Other.<\/p>\n

Revenues reached over $63 billion for the quarter. Sundar highlighted the momentum we see in Search which directly impacts our advertising business. We continue to accelerate the deployment of Gemini across our entire ads infrastructure to boost performance in three areas mentioned before: ads quality, advertiser tools, and AI user experiences.<\/p>\n

First, ads quality. At Google Marketing Live, we showcased how Gemini improves query understanding, allowing us to find relevant ads for longer searches, previously difficult to monetize.<\/p>\n

The core engine of our search ads relies on a dual prediction: delivering immediate utility for the user, while maximizing measurable value for the advertiser. Gemini completely supercharges this capability. We use Gemini's advanced reasoning to decode the nuances of longer, more detailed queries. With Shopping ads, for instance, we drove a 20% improvement in showing highly relevant ads, helping shoppers immediately find the best match.<\/p>\n

Second, advertiser tools. Take AI Max. It has become the core building block for advertisers to fully participate in our new AI experiences. It's out of beta, and half a million advertisers have already adopted it. Those who adopt our AI‑powered campaigns like AI Max or PMax see an average of 15% more conversions or value on Search at a similar ROAS.<\/p>\n

AAA Auto Club Enterprises used AI Max to personalize creative assets and capture growth from increasingly detailed insurance searches. This led to a 17% improvement in conversion volume and an 11% decrease in cost per lead.<\/p>\n

We see strong adoption of our generative AI creative tools, which makes creative development easier, especially for SMBs. In fact, over half of our SMB customers globally use AI to create or optimize their creatives.<\/p>\n

Third, new AI user experiences. At I\/O, we showed how Search ‑‑ including AI Overviews and AI Mode ‑‑ works as one connected experience.<\/p>\n

As you saw from our results, our performance across this holistic system is robust. We continue to be encouraged with monetization performance on queries that show AI Overviews, even as we've expanded AI Overviews to more commercial queries. Across AI Overviews and AI Mode, people are asking more specific and detailed questions, providing opportunities for more relevant ads.<\/p>\n

Within AI Mode, we continue to test and deploy a range of new ad formats. For text ads, we improved performance by adding contextual sitelinks based on the conversation. Direct Offers is gaining momentum, with partners like IHG Hotels & Resorts soon surfacing special offers during trip planning. And Highlighted Answers ‑‑ our latest experience placing clearly marked sponsored links inside list responses ‑‑ is showing early user traction.<\/p>\n

Looking at Commerce. In collaboration with the retail industry, we established the open‑source Universal Commerce Protocol, UCP, as the new standard for agentic commerce. Merchants are rapidly adopting UCP, with Target and Steve Madden now live, while new members have joined the UCP Shopping and Food Tech Councils to help steer its vision. We also announced Universal Cart, allowing shoppers to add to items from different retailers across Google surfaces and buy in a single checkout.<\/p>\n

Now, onto YouTube. As a FIFA‑preferred platform partner, we helped fans around the world tune in to the games. As Sundar mentioned, over 1.7 billion unique viewers watched World Cup‑related videos, and over 550 million watched them on their televisions. This made the FIFA World Cup 2026 the most‑viewed World Cup in YouTube history. Advertisers connected with fans through FIFA Channel Takeovers, Gemini‑powered soccer‑themed Sponsorships and gameday mastheads.<\/p>\n

And, of course, a huge congratulations to Spain for taking home the trophy!<\/p>\n

More broadly on YouTube, we introduced an exclusive slate of Creator Shows, making it easier for brands to tap into the fandom of creators. We launched Custom Sponsorships to put brands at the heart of the world's biggest moments as they unfold on YouTube, using AI to dynamically surface videos tailored to a brand's desired moment.<\/p>\n

Brands continue to partner with YouTube creators to engage new audiences<\/p>\n

Kate Spade reached Gen Z through a first‑of‑its‑kind YouTube creator campaign and partnered with creators Ellie Thumann and Hannah Meloche. By leveraging multiple format videos on YouTube, the brand drove a 3.25% brand lift in purchase intent.<\/p>\n

This unique convergence of brand equity and commercial action makes YouTube a powerful full‑funnel platform. SMBs continue to fuel our Direct Response growth through campaigns like Demand Gen. They leverage our AI to scale visual storytelling across YouTube, Shorts, and now Google Maps.<\/p>\n

To attract high‑value shoppers across North America and Europe, outdoor brand Arc'teryx used Demand Gen to achieve a 70% better return on their ad spend compared to other paid channels.<\/p>\n

Looking at monetization across YouTube, we are driving sustained growth across our key priorities. In the Living Room, we see continued momentum across both Brand and Direct Response. With the launch of Buy with Google Pay, viewers can complete purchases directly on their CTV, turning the TV screen into a stronger performance surface. Shorts continues to deliver high‑performing opportunities for social and video buyers alike.<\/p>\n

Beyond advertising, YouTube's Subscription business, which thrives across living room screens, is growing faster than Ads, particularly driven by YouTube Music and Premium.<\/p>\n

Internally, we leverage Gemini to transform how we work and how we serve our customers. 83% of our Sales team uses Gemini‑assisted tools weekly, driving up a 20% higher win rate when using customized pitch narratives. Our Ads Customer Support teams use Gemini‑powered agentic solutions that now autonomously address 75% of support queries, freeing them to solve our customers' most complex challenges. Similarly, our new agentic solutions for SMBs have expanded our reach by hundreds of thousands of new customers year to date.<\/p>\n

As always, ending with Partnerships. We are seeing more businesses benefit from the unified strength of Google's AI stack.<\/p>\n

Booking Holdings expanded a multi‑year Cloud commitment and are partnering closely to advance our AI‑powered ad formats. It is also deploying Google AI technology to enable new customer experiences, like agentic dining reservations on OpenTable, helping restaurants get discovered and booked right when it matters most.<\/p>\n

In closing, I'd like to thank Googlers everywhere for their contributions to our success, and our customers and partners for their continued trust.<\/p>\n

Anat, over to you.<\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thank you, Philipp.<\/p>\n

My comments will focus on year‑over‑year comparisons for the second quarter, unless I state otherwise.<\/p>\n

I will start with results at the Alphabet level, and will then cover our segment results. I'll end with some commentary on our outlook for the third quarter and full year 2026.<\/p>\n

We had an outstanding second quarter, delivering our 12th consecutive quarter of double‑digit revenue growth.<\/p>\n

Consolidated revenues were $119.8 billion, up 24% with 23% in constant currency.<\/p>\n

Total cost of revenues was $45.9 billion, up 18%. TAC was $16.2 billion, up 10%.<\/p>\n

Other Cost of Revenues was $29.8 billion, up 22%, driven by increases in depreciation, inventory costs, primarily from the sales of TPU systems to customers, and content acquisition costs, largely for YouTube.<\/p>\n

Total operating expenses were up 27% to $33.1 billion.<\/p>\n

R&D expenses increased by 32%, driven by compensation from investment in AI talent, as well as depreciation.<\/p>\n

Sales and Marketing expenses were up 18% due to investments to support the Gemini app in Search, and compensation.<\/p>\n

G&A expenses increased 24%, primarily driven by compensation and charges for certain legal and other matters.<\/p>\n

Operating income increased 30% to $40.8 billion, and operating margin was 34%.<\/p>\n

Other income and expenses was $98 billion, representing a substantial increase from the prior year, primarily due to unrealized gains in our equity securities portfolio.<\/p>\n

Net income and earnings per share increased significantly, primarily due to the unrealized gains in OI&E I just mentioned.<\/p>\n

We generated strong operating cash flow of $39.1 billion in the second quarter and $185.7 billion for the trailing 12 months.<\/p>\n

CapEx was $44.9 billion in the second quarter, with the vast majority of the spend in technical infrastructure to support our investments in AI. Approximately 60% of our investment in technical infrastructure this quarter was in servers, and 40% was in data centers and networking equipment.<\/p>\n

We had negative free cash flow of $5.9 billion in the second quarter, driven by our investments in CapEx.Free cash flow was $53.3 billion for the trailing 12 months.<\/p>\n

We ended the quarter with $242.5 billion in cash and marketable securities, which includes $87.1 million of equitable marketable securities. Long‑term debt was $98.2 billion.<\/p>\n

And, as mentioned in our press release, our Board of Directors declared a quarterly cash dividend on our common stock of 22‑cents per share, which is payable in September.<\/p>\n

Turning to segment results. Google Services revenues increased 15% to $94.5 billion, reflecting strong growth in Search and Subscriptions.<\/p>\n

Total advertising revenues were up 14% with growth across all major verticals. We experienced strong Ads growth related to the World Cup, particularly in YouTube Ads.<\/p>\n

Google Search and other advertising revenues increased by 17% to $63.3 billion, with retail and finance driving the largest contributions.<\/p>\n

YouTube advertising revenues increased 13% to $11.1 billion, driven by Direct Response advertising as well as Brand, with strength in the Living Room, as Philipp mentioned earlier.<\/p>\n

Network advertising revenues of $7.3 billion were down 1%.<\/p>\n

Subscriptions, Platforms & Devices revenues increased 15% this quarter to $12.9 billion due to strong growth in both YouTube subscriptions, particularly YouTube Music and Premium, and Google One, which was driven by demand for AI plans.<\/p>\n

Google Services operating income increased 20% to $39.5 billion, and operating margin was 41.8%.<\/p>\n

The Google Cloud segment delivered outstanding results in the second quarter, driven by our enterprise AI products and services. Cloud revenues were up 82% to $24.8 billion, driven primarily by GCP, which grew faster than Cloud overall. Core GCP, AI solutions, and AI infrastructure were all important drivers of growth.<\/p>\n

We also began to recognize revenues from TPU system sales, which we delivered to customer data centers for the first time in Q2. Cloud revenue growth accelerated meaningfully, even after excluding the impact of TPU system sales.<\/p>\n

Cloud operating income was $8.8 billion, more than tripling year‑over‑year, and operating margin increased from 20.7% in the second quarter last year to 35.6%.<\/p>\n

Google Cloud's backlog increased by more than $50 billion sequentially, reaching $514 billion in the second quarter. The increase was driven by strong demand for our Enterprise AI offerings. The majority of the backlog is related to typical GCP contacts for our broad mix of customers, and we expect to recognize just over 50% of the total backlog as revenue over the next 24 months.<\/p>\n

In Other Bets, revenues were $382 million, and operating loss was $1.8 billion as we continue to expand Waymo's business and invest in key Other Bets.<\/p>\n

In Alphabet Level Activities, the operating loss was $5.8 billion, driven by shared AI R&D expenses.<\/p>\n

Turning to our outlook in business performance expectations in the second half of 2026.<\/p>\n

First, in terms of revenues, at the current spot rates, we would expect a slight FX headwind to our consolidated revenue in Q3, compared to a one percentage point FX tailwind in Q2. This impact will be seen primarily in Search and YouTube Ads.<\/p>\n

In Google Services, as Philipp mentioned, we continue to benefit from innovation in Search by improving the user and advertiser experience with AI. At the same time, in Q3, we will begin lapping an acceleration in Search performance that began in the third quarter last year.<\/p>\n

In Google Cloud, we're seeing significant demand for products and services, which we expect to drive strong growth. As I mentioned earlier, we started delivering TPU systems to customer data centers in the second quarter. We continue to expect to recognize a relatively small portion of the revenues from our existing TPU system sales agreements this year, ramping as we exit 2026. We anticipate the vast majority of the revenues from these agreements will be realized in 2027.<\/p>\n

And given the supply constraint environment, we plan to expand the use of third‑party capacity in Q3 as a bridging strategy while we build out more internal capacity. This strategy allows us to keep growing our customer base and capture greater overall value. However, it will create modest margin pressure in the near‑term as we utilize this capacity.<\/p>\n

Moving to investments, we are updating our full year 2026 CapEx guidance range to $195‑205 billion, up from our previous estimate of $180‑190 billion. The increase in the range is primarily due to an acceleration in the delivery of capacity to meet growing demand.<\/p>\n

As we previously shared, we continue to expect our CapEx to increase significantly in 2027, and we'll provide more details at a later date.<\/p>\n

In terms of expenses, the significant increase in our investments and technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expense and related data center operations costs, such as energy. We also expect to continue hiring in key investment areas such as AI and cloud, and we are investing in marketing to support our AI products.<\/p>\n

And finally, we expect the free cash flow will remain under pressure driven by our investments in technical infrastructure, which enables us to capitalize on the AI opportunity and continue to drive attractive returns.<\/p>\n

Q2 represented another strong quarter. Our teams continued to deliver impressive innovation, executing with discipline and velocity.<\/p>\n

I'm going to take this opportunity to thank our employees for their contribution to our performance. Sundar, Philipp and I will now take your questions.<\/p>\n

Operator: <\/strong>Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone. To prevent any background noise, we ask that you please mute your line once your question has been stated.<\/p>\n

Our first question comes from Brian Nowak with Morgan Stanley. Your line is now open.<\/p>\n

Brian Nowak (Morgan Stanley): <\/strong>Thanks for taking my questions. I have two. One for Sundar, one for Anat.<\/p>\n

Sundar, with more time and gen AI products and tools in the market and investments continuing to step up, can you just kind of give us some perspective on how your view on the size of the overall gen AI ROIC opportunity and the timing of the ROIC has changed now versus one year ago?<\/p>\n

And then, Anat, you talked quite a bit about supply capacity constraints. A similar question for you around forward CapEx. How does your budgeting philosophy and just constraints you're putting on the forward spend, how are those changing as you sort of think about the right amount to spend in 2027 to close this capacity constraint?<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Look, thanks, Brian. It's a good question.<\/p>\n

I do think it feels like we are in very early innings of what feels like a secular shift across multiple areas. In our core information businesses, just the possibilities. When I see what all you can do with absolute frontier capabilities, there's still a lot of work ahead to translate all of that into experiences for our consumer users. You can think about end‑to‑end agentic experiences to really meaningfully do a lot more for them. So all of that looks like extraordinary opportunities with extraordinary returns for executing well on those opportunities.<\/p>\n

Similarly, on the Enterprise side, as you can see from our demand, which is reflected in our growth rates, et cetera, again, in my conversations with many CEOs, many companies, they all still are barely scratching the early stages of what's possible here.<\/p>\n

So, I think we used to talk about Cloud itself. A small percentage of overall workloads and enterprises have shifted to cloud. Now think about what percentage of workloads are really AI‑native and AI‑enabled. It, again, feels like very, very early.<\/p>\n

So, I would say from an ROIC standpoint, I think we are taking a full‑stack approach. We are seeing momentum across consumers and enterprises and developers and so on. So it feels like, if anything, over the past year, we have gotten more bullish on the opportunities ahead.<\/p>\n

I'll turn it over to Anat. <\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>Thanks for the question on how do we think about forward‑looking CapEx in the context of supply constraints.<\/p>\n

So, we're still in a supply‑constrained environment. I think we've said this now for multiple quarters in a row. And we are seeing very strong demand, both from external Cloud customers as well as across the business. And our goal is to invest as long as we see an attractive return on that investment, as Sundar mentioned earlier.<\/p>\n

We do take a long‑term view, so we take a multiyear view, at what the needs are, as well as focus on next year in the near term and building aggressively to meet those demands.<\/p>\n

And as you've seen, while we have increased our capacity quite significantly over the past three years, the demand still outpaces that investment. And we are, just like the rest of the industry, working in a supply‑constrained environment, so we're working hard to do this.<\/p>\n

We do have a benefit of having a full‑stack approach, so we're able to drive operational efficiencies, technological efficiencies within our technical infrastructure organization so that we can deliver more compute.<\/p>\n

But as long as we see these attractive opportunities to invest, we will continue to invest.<\/p>\n

Brian Nowak (Morgan Stanley): <\/strong>Thank you both. <\/p>\n

Operator: <\/strong>Our next question comes from Doug Anmuth with JP Morgan. Your line is now open.<\/p>\n

Douglas Anmuth (JP Morgan): <\/strong>Thanks for taking the questions. One for Sundar and one for Anat.<\/p>\n

Sundar, can you talk about your confidence level that the Gemini models can remain at the frontier? I know you had the Gemini ‑‑ the Flash model releases this week. But Google perhaps doesn't make maybe quite as much noise as some of the other leading labs, or perhaps have quite the frequency. Just curious how you'd address any concerns about that ability to continue developing leading models.<\/p>\n

And then just related, can you talk about your plans for coding and how you look to close the gap in that part of enterprise.<\/p>\n

And then, Anat, just following the recent equity and debt raises, can you just help us understand how you think about optimal capital structure and how you view the cost of debt versus equity. Thanks.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Doug.<\/p>\n

Look, I think the frontier is (an) incredibly dynamic space, and it's fiercely moving forward. At any given moment when you take a snapshot, it feels dynamic. We have had clearly frontier models. There are many attributes on which we are still at the frontier. There are areas where we have acknowledged we need to improve. Coding and agentic coding is an example of that, and I think the teams are very, very focused on it.<\/p>\n

With 3.6 Flash ‑‑ and by the way, Flash is our workhorse model. And we see tremendous demand for it, given it generally hits a sweet spot of performance, cost, reliability, latency, et cetera. And we've incorporated Gemini and Flash particularly in our entire portfolio of solutions, be it in cybersecurity, data analytics.<\/p>\n

If you think about an area like customer service, you need really good voice quality, you need livestreaming, you need the ability to reason on that. If you're a professional services firm, you need high quality summarization, content generation, et cetera.<\/p>\n

So, Flash does very well on all of that. In terms of agentic coding, we are iterating, and you will see us continue iterations. 3.6 Flash, for example, compared to 3.5 Flash, jumped over ten points in deep SWE as a benchmark, and it is more token efficient at doing so. So we are clearly using it internally, we are testing it with many customers in coding, so we see the progress, just in six weeks from the prior version to the new version, and you will see more continued iterations on that as well.<\/p>\n

In terms of the frontier, we are both very committed and very confident of being at the frontier.<\/p>\n

For the next generation of frontier, you're going to need much larger base models. We are now training Gemini 4, and we're being very ambitious with it. I am very excited by the progress I'm seeing internally on Gemini 4, and I'm confident that people will be pleased when we are putting it outside.<\/p>\n

But we will need Gemini 4 as a larger base model to compete at that frontier model, and so we are focused on executing on that path. <\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>And on the question regarding our capital structure and recent equity and debt raise.<\/p>\n

So, as we think about our investment needs ‑‑ and as I said, we look at the next year and multiple years out ‑‑ we first look at how much we can support based on cash from operations. And as you've seen in our results today, we continue to generate very healthy, strong cash flow from operations; so that's our first source of funding.<\/p>\n

And then we look at debt, and most recently we did the equity raise.<\/p>\n

And we have expanded our debt portfolio quite significantly over the past 12 months. If you've seen a year ago, we were at about $16 billion; and we went to about $100 billion across multiple currencies and geographies. So we're expanding that portfolio.<\/p>\n

But we also want to make sure we have a resilient ‑‑ not just growth outlook, but also a resilient balance sheet and a strong balance sheet, a healthy balance sheet, which is the rationale behind expanding into the equity markets.<\/p>\n

At this point, we're not planning to go back to the equity markets, with the exception of ‑ as you recall, part of our equity offering was the ATM, or at‑the‑market, offering that we will do to address the stock‑based ‑ or the tax on SBC, which we'll do for some period of time.<\/p>\n

But we look at those three dimensions, the cash flow from operations, debt levels, and equity and a way to balance it, in a way that ensures that we continue to maintain a healthy balance sheet.<\/p>\n

Douglas Anmuth (JP Morgan): <\/strong>Thank you both.<\/p>\n

Operator: <\/strong>The next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.<\/p>\n

Eric Sheridan (Goldman Sachs): <\/strong>Thanks so much for taking the questions. Maybe two, if I could, both on TPUs.<\/p>\n

Sundar, can you talk about some of your key learnings as you scale your TPU efforts in terms of both the demand for TPUs and how you think about balancing the external demands for TPUs versus the internal demand for custom silicon inside the organization as you look over the next couple years.<\/p>\n

And then, Anat, if I could just follow up. You made some comments in your prepared remarks about the impact of TPUs on Google Cloud. Didn't know if you could give us a little bit more granularity about the size of TPUs as a part of the revenue backlog and how to think about the revenue recognition over the potential for margin impact from TPUs in the years ahead. Thanks so much.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>I think in terms of ‑‑ first of all, we are very pleased with our TPU roadmap progress and the value in terms of performance and the edge it gives, and we obviously use it extensively.<\/p>\n

In terms of allocating TPUs, look, our first priority is making sure we are allocating what we need to compete at the frontier in terms of AGI development. And so that is the foundation for everything we do.<\/p>\n

But given the extraordinary demand to balance the external demand, even for most Cloud customers, we are using both TPUs and GPUs mainly for serving our models. So think Vertex AI, Gemini Enterprise, the momentum we see. So we are using it ‑‑ or agentic workloads, et cetera. So, we are using it for those purposes.<\/p>\n

To the extent people want it as infrastructure, we are balancing it by increasingly looking at opportunities to put TPUs in their data centers, or in other data centers, like the project we are doing with Blackstone, et cetera. So we are using that as an ability to balance and make sure we are allocating as much of the available compute for frontier model development, as well as serving both our consumer business and our Enterprise business in terms of first‑party models.<\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>And in terms of revenue recognition and how we look at the TPU system sales, so the way to think about it is the following. When we signed the agreements that I've mentioned in the prepared remarks, they would be then reflected in the cloud backlog.<\/p>\n

Now, the vast majority of the $514 billion of cloud backlog is the GCP agreements. But the TPU system sales are reflected in that backlog.<\/p>\n

We start building inventory to be able to sell those systems, so you see that impact on the cash from operations, because we built ahead, obviously, as we're building that business and ramping up.<\/p>\n

And then once we start delivering the sales, generally that's when we start recognizing revenue. This quarter was a small amount of that total agreement. We'll continue to ramp up throughout 2026, but then you'll see the vast majority of the revenue from that agreement come through in 2027.<\/p>\n

Operator: <\/strong>Your next question comes from Ross Sandler with Barclays. Your line is now open.<\/p>\n

Ross Sandler (Barclays): <\/strong>Just back to the AI model kind of war that's going on, Sundar. Just want to ask about the speed of model releases and how you can potentially speed up the cadence by which Gemini is releasing models.<\/p>\n

So we all saw the third‑party compute deal with SpaceX. What else are we doing to kind of speed up the pace of model releases compared to some of the other folks out there?<\/p>\n

And then you just mentioned the Flash models, which have been very successful, to your point. Do you view that as the right end of the market to be in, given how crowded the lower‑cost end of the model space has become? Just any thoughts on how you see all that playing out.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Thanks, Ross.<\/p>\n

Look, two things I'll say first of all. We really think about the Pareto frontier. We want to make sure for our customers we are offering our best models at various price points. So you will see us ‑‑ but it's very important to us to have the best frontier models out there, as well as models which are very performant and low cost. This is why we have Flash‑Lite, Flash, Pro, et cetera. So, we are committed to being at the full Pareto frontier.<\/p>\n

On the speed of model releases, I do think you will see us continue to pick up pace. Obviously, you've seen us come with the ‑‑ we announced 3.5 Flash at I\/O. We have followed that up with 3.6 Flash, and you will see continued iterations of that model with further progress in agentic coding, et cetera.<\/p>\n

We are really focused, putting a lot of effort into Gemini 4. It's a very ambitious effort. We want to compete at the frontier level of where the frontier will be when Gemini 4 comes out, and so we are applying a lot of our compute and effort in that direction.<\/p>\n

But with that, we are creating a baseline on top of which you will see us rapidly iterate with subsequent model releases. And so picking up pace and releasing models almost at a monthly cadence is part of our roadmap as we are building Gemini 4 as well.<\/p>\n

Operator: <\/strong>Your next question comes from Michael Nathanson with MoffetNathanson. Your line is now open.<\/p>\n

Michael Nathanson (MoffetNathanson): <\/strong>Thank you. One for Sundar and one for Anat.<\/p>\n

Sundar, just keeping with the model theme of this call, can you talk a bit about what do you think the moats are to this new model war? What is your strategic advantage that fuels your business? Even if it's the same type of model capabilities, what gives you the edge to keep growing like you're doing?<\/p>\n

And then, Anat, back to Eric's question. Anything you can tell about the margin impact on TPUs going forward? Is it incremental margin to the core cloud margin, or is it a lower margin coming through? Thanks.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Look, Michael, first of all, there are many layers at which we are providing solutions. I think part of what the value of our full‑stack approach is, customers are coming to us for solutions.<\/p>\n

So if you take an area like cybersecurity or data analytics, people are deploying solutions in which models are an ingredient in that solution.<\/p>\n

So take cyber. People are using Chronicle and Wiz; and with our upcoming CodeMender product, they are using it to detect and patch vulnerabilities and so on. Or take data analytics, people are bringing what's been in the past siloed data sources, putting it all together and having an intelligence layer on top of it with Gemini Enterprise.<\/p>\n

And so the model is just an ingredient in those solutions, so I think it's important to remember that.<\/p>\n

Then, even within where you're purely on a more model consumption area, people are ‑‑ there is what looks as models are increasingly becoming end‑to‑end orchestrated systems, right? Workflows, agentic workflows.<\/p>\n

And to develop all this, it's your ability not just to bring the compute you need to train and serve, the data quality, the environments you have, your ability to continually improve, provide customers with that peace of mind that all the data they have, their data, their trajectories are confidential to them.<\/p>\n

None of that in any way flows back to the models. Their ability to configure and serve all this in a secure way, and manage it and provision it and so on.<\/p>\n

So, these are big end‑to‑end things, and so this is what our Cloud business as a whole is focused on building, and we are seeing demand across all of these components.<\/p>\n

And so obviously, having our own models allows us to really optimize these solutions and bring integrated offerings, but we will also provide other models as part of these solutions. We also bring infrastructure as part of these solutions, et cetera, and take a whole full‑stack approach.<\/p>\n

So I think we are very, very well‑positioned there.<\/p>\n

Anat Ashkenazi, SVP and CFO, Alphabet and Google: <\/strong>And on the TPU margins, we don't break out margins for any specific products or infrastructure component, and certainly there are benefits from designing and manufacturing our own chips.<\/p>\n

But the way to think about it is this is an expansion of our total addressable market, so it expands the opportunities by providing solutions to customers that need those systems in their data centers.<\/p>\n

But overall, if you think about the cloud margins, obviously a really fantastic expansion of margin to 35.6% this quarter. Outstanding strong operational discipline across the business in leveraging growth in the top line.<\/p>\n

And now as you think about Q3 and through the remainder of the year, and I mentioned some of it in the prepared remarks, given the supply‑constrained environment we're in, we are planning to expand the use of third‑party capacity in Q3 as a bridging strategy, while we continue to build out internal capacity. That capacity, given the cost of that capacity, will put some pressure on operating margins for Cloud.<\/p>\n

And then the last item we mentioned in the past was the integration of Wiz does create some headwind here in the near‑term in 2026 related to the acquisition.<\/p>\n

Michael Nathanson (MoffetNathanson): <\/strong>Thanks, guys.<\/p>\n

Operator: <\/strong>Your next question comes from Mark Shmulik with Bernstein. Your line is now open.<\/p>\n

Mark Shmulik (Bernstein): <\/strong>Thanks for taking the questions. Anat, just on these third‑party deals and kind of the bridge in capacity, is there a particular objective where the constraints are most severe, or is it really broad‑based?<\/p>\n

And I guess, stepping back a bit and thinking about capacity allocation across the businesses, has that changed at all?  Or is there a way to contextualize how you're now thinking about the tradeoffs between allocating compute to Search versus model training versus for the GCP business? Thank you.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Mark, I can comment on it. Look, again, on allocation, the baseline with which we start is what it takes to continue AGI development at the frontier. Obviously, the priors on that are just based on where the model frontier moves. And so we start with that as a baseline.<\/p>\n

And beyond that, we want to obviously ‑‑ we are prioritizing our core product areas like Search, YouTube, et cetera, as well as Cloud. And within Cloud, we are prioritizing the compute to make sure we can serve our models in the context of Vertex and Gemini Enterprise and our core solutions, be it data analytics and cybersecurity, et cetera.<\/p>\n

So our core ‑‑ serving for our core products across consumers and Enterprise is where the computer is primarily going, and that's how we think about it.<\/p>\n

I think on the bridge deal, the main thing I would say is, look, there are ‑‑ on the margin, there are very, very large customers of ours on Cloud who ‑‑ we are trying to support them through this extraordinary moment. And the incremental opportunities they are bringing to us, while a short‑term cost over a few months may be very high, in the lifetime of the deal, as we bring more capacity on, is highly ROI‑positive.<\/p>\n

So those are factors we are taking into account. So are you willing to take upfront a six‑month deal to be able to serve the customer in what is a multiyear opportunity where the margins and the returns are very, very attractive over that multiyear horizon? <\/p>\n

So hopefully that gives some color on how we've thought about those opportunities.<\/p>\n

Operator: <\/strong>Your next question comes from Ron Josey with Citi. Your line is now open.<\/p>\n

Ron Josey (CitI): <\/strong>Thanks for taking the question. Maybe I'll switch topics somewhat and, Philipp, ask you a little bit more about monetization from a Search and YouTube perspective. Just given the greater signal we have with AI searches, and then you talked about YouTube's strength, talk to us a little bit more on how advertisers are leveraging the greater personalization and targeting that Google has to drive this ROAS.<\/p>\n

A question we often get is, Google at that size and scale, we're still growing 17%. Any reasons what's driving that all‑time high on Searches? Thank you.<\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>Yes. Thank you so much for the question.<\/p>\n

Look, our 17% year‑over‑year growth rate in the Q2 Search and Other revenues was really driven by many parts of our business working well together and very, very deep Gemini integration.<\/p>\n

Maybe to zoom out for a second, all the major verticals contributed to the growth. Retail drove the greatest contribution that managed ‑‑ followed by really meaningful contributions from finance, tech, media entertainment, and so on.<\/p>\n

I think it's really important to understand that Gemini supercharges our ability, and this goes specifically to your question, to understand what people are looking for, and match the right Ads. So we're applying Gemini models really across our entire Ads infrastructure, whether it's Ads quality, advertising, tools, Ads and new AI experiences.<\/p>\n

And we're really deeply, deeply integrating Gemini into the customer tools to make the campaigns more efficient, which comes on top of this.<\/p>\n

And then we have our AI‑powered campaigns like AI Max that help advertisers actually adapt and find the opportunities beyond keywords. Again, that's an ability for us to go deeper and target better. And AI Max continues to unlock ‑‑ we mentioned this ‑‑ billions of net new searches that weren't really monetizable before.<\/p>\n

And then on the YouTube side, high level, the Ads growth was driven by Direct Response and brand advertising. I shared earlier, we continue to see a lot of momentum in the Living room. We have a really exciting Ads roadmap as well ahead of us on the Brand side, on the Direct Response side. Demand Gen and Shorts remain really interesting opportunities here. Again, this has targeting components to it, obviously.<\/p>\n

And we continue to innovate really heavily in Direct Response, with shoppable ads format in the living room, which will help us drive strength in retail as well.<\/p>\n

Operator: <\/strong>Your next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.<\/p>\n

Ken Gawrelski (Wells Fargo): <\/strong>Thank you very much. Two questions, please.<\/p>\n

First, how would you assess the forecasted returns on compute capacity investments in '27 compared to prior years, '25 and '26. In light of the supply chain constraints and supply chain inflation we're seeing, I'm curious as to how you think about the return profile of '27 and kind of future investments versus past investments in capacity.<\/p>\n

And a second one, a little different topic here. When you think about Waymo, what are the key factors you would consider when evaluating a change in corporate structure for Waymo? I know you've previously been reticent to talk about this, but the business is scaling. Clearly there's leadership there, and has a lot of momentum. Under what conditions would it make sense for Waymo to live outside of Alphabet? Thank you.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Look, Ken, on your first question, if I understand it, we are working off a disciplined ROIC framework here. Obviously, to the extent that our input costs going up to us, we reflect that in our ability to price our solutions and see returns there. So all of that is factored into how we are planning.<\/p>\n

I think our compute capacity investments in '27, I think to the first question I answered, I think we are seeing strong demand indicators, including long‑term deals, existing deals which we have which are renewing with exceptional demand on a moving forward basis.<\/p>\n

And so we are using all that to plan and invest accordingly. And so, I think, if anything, the dynamics look healthier than where we were about a year ago. And so that's what gives us the confidence to undertake those investments.<\/p>\n

On Waymo, look, I think we are really focused on executing and scaling up Waymo. We have set it up with our (Other) Bets structure and given the team a lot of support. Alphabet has continued ‑‑ I think our ability to think and plan long‑term and invest in the business and give them that long‑term roadmap, the confidence in undertaking a long‑term roadmap, and scaling up, I think it's all hugely valuable.<\/p>\n

We're really focused on scaling the business right now and executing to that extraordinary potential, and that's what we are focused on.<\/p>\n

Ken Gawrelski (Wells Fargo): <\/strong>Thank you very much. <\/p>\n

Operator: <\/strong>Our last question comes from Shweta Khajuria with Wolfe Research. Your line is now open.<\/p>\n

Shweta Khajuria (Wolfe Research): <\/strong>Okay. Thanks a lot for taking my question. Perhaps, if I could please ask you two. One is on TPU long‑term strategy. Longer term, is it fair to think that as TPU sales scale, you'd build merchant silicon business with a software stack that goes with it?<\/p>\n

And second is on YouTube revenue, given how strong engagement is, what are some of the factors that could drive accelerating growth rate at YouTube on a go‑forward basis? Thank you.<\/p>\n

Sundar Pichai, CEO, Alphabet and Google: <\/strong>Maybe I'll answer the first one, and Philipp can broadly talk about YouTube revenue growth as well.<\/p>\n

On the first one, on TPUs, look, I think we are ‑‑ we've been operating with TPUs for a while. A lot of our cloud serving is done on TPUs, and we are also seeing strong demand for TPUs as standalone systems up from other customers.<\/p>\n

And so, obviously, the industry has constraints, too, so we have to plan and reallocate on a forward‑looking basis along the principles I spoke about earlier. So I don't want to project out too far into the future there.<\/p>\n

But I do think we are ‑‑ obviously, we will scale up based on the opportunities we see and the demand we see, commensurate with the constraints that exist and the allocation needs we have for frontier model development, making sure we can serve our consumer businesses and Enterprise businesses well.<\/p>\n

And, Philipp, you want to add on YouTube monetization? <\/p>\n

Philipp Schindler, SVP and CBO, Google: <\/strong>Yes. Thank you so much.<\/p>\n

So, look, I mentioned that the drivers of YouTube Ads revenue growth. I think there's a lot of things we're actually excited about when we look at our Ads roadmap here. In brand, we see ongoing opportunities on connected TVs in the living room. We're building tools to help advertisers find creators scale across screens and then measure the results, and we have a slate of new and returning creator shows that are coming exclusively to YouTube.<\/p>\n

We see opportunities in Direct Response, particularly with Demand Gen and Shorts, which I mentioned remain a really interesting opportunity here to expand our base to more small and medium advertisers across more verticals, short of videos. Actually, this important one creates more opportunities for less disruptive Ads, increasing the overall ad effectiveness, so we're going to continue to see a lot of innovation, in my opinion, in Direct Response with shoppable ad formats in the living room, which again, we mentioned that drives retail strength.<\/p>\n

We announced a few other formats here at Brandcast. We announced Buy with Google Pay, to enable CTV viewers to actually complete purchases directly on their TV with two clicks, which is a really interesting opportunity over time. We launched the Affiliate partnership boost to drive incremental sales, and the creator earnings obviously from YouTube Shopping affiliate commissions.<\/p>\n

So, overall, frankly very, very exciting times.<\/p>\n

Shweta Khajuria (Wolfe Research): <\/strong>Thanks, Sundar. Thanks, Philipp.<\/p>\n

Operator: <\/strong>Thank you. 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.<\/p>\n

Jim Friedland, Head of Investor Relations: <\/strong>Thanks, everyone, for joining us today. We look forward to speaking with you again on our Third Quarter 2026 call. Thank you, and have a good evening.<\/p>\n

Operator: <\/strong>Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.<\/p>","DocumentFileSize":"310 KB","DocumentFileType":"PDF","DocumentPath":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/Jul\/22\/2026_Q2_Earnings_Transcript.pdf","EventId":1061,"EventSpeaker":[],"ExcludeFromLatest":false,"FinancialReportWorkflowId":"00000000-0000-0000-0000-000000000000","GlobalTimeZoneId":10,"IsWebcast":true,"LanguageId":1,"LinkToDetailPage":"\/investor\/events\/event-details\/2026\/2026-Q2-Earnings-Call-2026-GgTAq7Is0z\/default.aspx","LinkToUrl":"","Location":"","OpenInNewWindow":false,"PressReleaseWorkflowId":"00000000-0000-0000-0000-000000000000","ProjectWorkflowId":"00000000-0000-0000-0000-000000000000","ReportQuarter":"","ReportYear":"","RevisionNumber":45180,"SeoName":"2026-Q2-Earnings-Call-2026-GgTAq7Is0z","TagsList":null,"TimeZone":"PT","Title":"2026 Q2 Earnings Call","WebCastLink":"https:\/\/www.youtube.com\/watch?v=LzExSq9DU9w","WorkflowId":"ee18d6d9-2dd1-415a-b2e6-224e6b960655","EndDate":"07\/22\/2026 14:30:00","EventFinancialReport":[],"EventPresentation":[],"EventPressRelease":[],"StartDate":"07\/22\/2026 13:30:00"},{"Attachments":[{"ContentFileWorkflowId":null,"DocumentType":"file","Extension":"PDF","Size":"177 KB","Title":"Transcript","Type":"Document","Url":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/Sep\/08\/Thomas-Kurian-Goldman-Sachs-Communacopia-09-08-26.pdf"},{"ContentFileWorkflowId":null,"DocumentType":"file","Extension":"PDF","Size":"2.27 MB","Title":"Slides","Type":"Document","Url":"https:\/\/s206.q4cdn.com\/479360582\/files\/doc_events\/2026\/Sep\/08\/Thomas-Kurian-Goldman-Sachs-Slides-09-08-26.pdf"},{"ContentFileWorkflowId":null,"DocumentType":"online","Extension":null,"Size":"","Title":"Cloud Blog: 3 Highlights","Type":"Document","Url":"https:\/\/cloud.google.com\/blog\/topics\/inside-google-cloud\/highlights-from-the-goldman-sachs-communicopia-and-technology-conference"}],"Body":"

This preliminary transcript is provided for the convenience of investors only, for a full <\/em>recording please see the Goldman Sachs Communacopia + Technology conference <\/em>webcast<\/em><\/a>.<\/em><\/p>\n

Eric Sheridan: <\/strong>Our next speaker is Thomas Kurian, the CEO of Google Cloud. Thomas joined Google Cloud as CEO in November of 2018, bringing deep enterprise experience to the company. He's grown the business into the world's largest public cloud, with nearly 100 billion annual revenue run rate.<\/p>\n

Some of the statements that Mr. Kurian may make today could be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to Alphabet’s Forms 10-K and 10-Q, including the risk factors. Any forward-looking statements that Mr. Kurian makes are based on assumptions as of today, and Alphabet undertakes no obligation to update them.<\/p>\n

I'll welcome Thomas to the stage to go through a handful of slides, and then we'll have a bit of a fireside chat. Thomas.<\/p>\n

Thomas Kurian: <\/strong>Thank you, Eric.<\/p>\n

Google Cloud is Alphabet's enterprise division. We take the products that Google builds and bring it to small enterprises, large enterprises, and governments around the world.<\/p>\n

Over the last several quarters, we continue to see strong growth for our business. We're winning new customers roughly twice as fast as a year ago, deepening our relationship with existing customers, capturing market share, and as a result, growing both top line and operating income.<\/p>\n

Now, the core of it comes down to the fact that we have highly differentiated products, and we remain the only provider that offers first-party solutions across the entire stack.<\/p>\n

We offer our own accelerators, and as the demand for training, inference, and computation grows, we're seeing lots of customers choosing us for infrastructure.<\/p>\n

On top of that, we build our own frontier models, and we've seen strong growth with Gemini in large companies, as well as in small companies, small and medium enterprises.<\/p>\n

Organizations increasingly want to connect AI to their internal systems, and they want to do three things with them:  Understand the data, secure their company, and automate processes or workflows within the organization.<\/p>\n

And across our portfolio, we have strength in data management, and we connect our historical strength and data management of products like BigQuery and machine learning tools. We connect AI to that, in the same way we connect AI to our security portfolio to help people with defense, and we offer a suite of applications from our collaboration applications like Workspace, to domain-specific applications.<\/p>\n

What's the value of having this diversified portfolio? First of all, it allows us to play in many large markets, each with individual large total addressable market segments.<\/p>\n

Second, as monetization of AI evolves, it allows us to diversify and capture revenue and share across every way. Some people buy silicon from us. Some people use our models. Some people use our data platforms. And so it diversifies the revenue streams that we capture.<\/p>\n

Third, because organizations want all of these things to work together, it differentiates our products from the point of view of quality, performance, and cost. Today we have over 17 product lines each over a billion dollars. They're growing quickly, and it shows you the diversification we have.<\/p>\n

We've seen more than 2x growth year-on-year in new customer acquisitions, and also 2x growth quarter-on-quarter and year-over-year in deals over $100 million, so large deals.<\/p>\n

And when a customer gives us a commitment, say, for $100, typically they spend more than 50% more than that. And so that's reflective of the adoption we're seeing and the growth we're seeing with our customer base.<\/p>\n

Now, let's look at each piece briefly. At the infrastructure level, even this morning, there was an article showing the total cost of ownership benefits of our own silicon. We offer the best computational infrastructure for AI, and we offer three types of silicon: Nvidia GPUs, our own tensor processing units, and as increasingly as models generate code and need to run code, we also offer our own ARM processors to run that.<\/p>\n

We offer 2.7 times better price performance for training, 80% better price performance for inference, 30% better price performance for CPUs. All of that allows us to differentiate our portfolio from other providers. It allows us to offer solutions to financial markets and capital markets, so a lot of hedge funds. Deutsche Börse, for example, is using us.<\/p>\n

And so beyond just the labs, capital market firms, high performance computing, people like Pfizer and a number of organizations in the government, the Genesis Mission in the United States government, for example, for energy, are using it for high performance computing, and of course, the number of labs as well.<\/p>\n

Now, our infrastructure gives us three important advantages. First of all, these are highly differentiated products in large markets.<\/p>\n

Second, they allow us to optimize the cost of our products on the silicon, so we co-design our products top-to-bottom. And so when we launch something like Gemini Flash 3.8 and people go: How come you guys are 2x better than anybody else in the market on inference per dollar? It's our tokens' real intelligence per dollar, it's because we can optimize that whole stack.<\/p>\n

And third, it allows us to support a range of different business models, all of which have strong growth return on invested capital.<\/p>\n

The size of our accelerator business, our TPU business is more than twice that of the next-largest hyperscaler.<\/p>\n

Second, our payback period on AI servers in aggregate is less than two years, and on our own silicon, it's half of GPUs’*. We have strong payback periods, and the majority of our infrastructure contracts, the total contract value of the infrastructure, is long-term committed five-year contracts.<\/p>\n

Now, on this platform, people have started using models beyond just answering questions or chat for task execution. You give the model an objective and you call that an agent, and the agent is given an objective. It decomposes that objective, uses a set of tools to connect into a company, and execute the objective for you and give you back a final answer.<\/p>\n

So, our platform is called Gemini Enterprise. It is used by over 90% of the Fortune 100, and thousands of small businesses.<\/p>\n

It's used in a very specific way. People want to use it as a reasoning agent. So, break the plan, understand the steps that are needed, reason on it, then execute the steps.<\/p>\n

So it uses a reasoning agent to understand all the information in the company, to then automate that workflow process. And when it does it, you want strong controls. What kinds of controls? Companies are worried about security. They're worried about auditing, what these agents are doing. They want to manage costs and set budget caps. We have all those controls. And we allow people to use the right model for the right task, so you don't have to always use the most expensive model, saving people a lot of money in doing so.<\/p>\n

We have a range of companies from insurance, Signal Iduna there is the largest insurance company in Germany. They use it for claims and underwriting analysis. We've got PepsiCo using it for supply\/demand planning. Macy's is using it for retail commerce, and there's a whole range of companies doing it.<\/p>\n

Now, on this infrastructure, we're also building domain-specific solutions that's built on this foundational platform. What do these domain-specific solutions do? They do the three important things that people want to use agents for. Help me understand my data, protect me from cybersecurity threats, and transform my applications and processes.<\/p>\n

For each of these, we bring together a stack of capabilities. Think of it as you're at PepsiCo and running a demand plan, and you want to model the forecast. The first thing you need to know is where's all my data. So we offer a platform that stores and manages a lot of data and can connect to other clouds to get the data.<\/p>\n

Second, tell me which of my different products are seeing growth, and in which countries and what metrics. Is it revenue? Is it inventory? What is growing? So you need something called a catalog that gives you the definitions of those things. You then need to execute a machine learning model to run the calculation for your forecast and surface up the answer.<\/p>\n

We do that super well. Example is our cost to run these models, machine learning models, 2.5 times better than the number one in the industry. And second, we do that with much greater accuracy, because the definitions of your financial metrics that Pepsi is looking at is in the catalog.<\/p>\n

Same thing from a security point of view. When cyber risk grows because of threats from AI models, there are two things people care about: How fast can you find vulnerabilities and how quickly can you repair them.<\/p>\n

We do that in the same way. By connecting AI to our Wiz platform. Wiz gives you the same capabilities. It helps you define what are your applications that need to be protected, which ones are high risk, have they been compromised, help me remediate them, and then test that I've actually fixed the issue. And we do the same in a number of application domains.<\/p>\n

So we are not just building a base platform. We're also integrating it into the core workflows of a company to help people understand their information, to help them modernize the processes, and to help them protect themselves.<\/p>\n

The benefits of these solutions. First of all, it allows us to bring the investment we're making in Gemini into many more markets. Number two, it helps us enhance the frontier. If you look at the frontier, the big challenges are can you give the model new skills, like forecasting, or long horizon planning? Can you help the model understand private data? Can you help the model behave in compliance with guardrails for safety? So it allows us to build that frontier.<\/p>\n

And lastly, it allows us to leverage the strength that we've had in Google Cloud's platform for many years, the strength we have with our analytics business and our database business, the strength we have with our cybersecurity portfolio, and the strength we have with our applications to bring AI along with that to a broad set of customers.<\/p>\n

90% of the Fortune 100 use our Gemini Enterprise portfolio. Separately, 90% of the Fortune 100 also use us for cyber defense. 80% of Google Cloud customers now use our AI products, and those that do use our AI products use 1.8 times as many products as those that do not, showing us being able to strongly upsell and cross-sell into this base.<\/p>\n

The lifetime value of a customer who uses our Gemini portfolio in the cloud, over a five-year period we estimate to be 1.5 times. And so all these are examples of things that we see where we're delivering strong return on invested capital.<\/p>\n

So, to close, our product differentiation stems from the fact that we are still the only provider that offers first-party solutions across the entire portfolio. Each layer of that gives us the ability to play in a large addressable market. We have strong positions in each of them, and that's what's driving our growth in new customer acquisitions, deepening relationships with existing customers, growing our partner ecosystem, and driving in aggregate top line and operating income growth. Thank you.<\/p>\n

Eric Sheridan: <\/strong>Thank you, Thomas.<\/p>\n

So, Thomas, you touched upon a lot of key themes in those slides that I want to come back to, the first being a vertically integrated technology stack. It's so critical to what you talked about today. It comes up a fair bit with respect to the company's approach to to market.<\/p>\n

Talk a little bit about that integrated stack and how it has a financial benefit for your business as well as it stands to benefit your customers.<\/p>\n

Thomas Kurian: <\/strong>So, I'll give you a real example to illustrate. Citigroup is building their wealth advisor on our Gemini platform, Gemini Enterprise platform, and it is designed to offer people financial advice.<\/p>\n

When you look at that, we're combining four important capabilities. The first one is the person who is getting financial advice sees an avatar, which is remarkably lifelike, offering them financial advice. They can ask it questions. They can assign it an objective, like my kids are going to college; can you tell me how to moderate my cash flow. That agent is built using Gemini Enterprise, and it uses the strength of our TPU infrastructure to provide extremely efficient, realtime streaming, because you want the agent and the avatar to behave properly.<\/p>\n

Second, they're reasoning on an objective. It is looking up financial information about the person who's asking the question, and it needs to be 100% accurate. It cannot give you wrong financial advice, because you'll lose trust in it. That uses our data platform for reasoning on financial information.<\/p>\n

Third, you clearly don't want such a system hacked, for obvious reasons. So, it uses our security tools to protect all this. And then because it's going to scale, you need to be extremely cost-efficient in ensuring that these models run and the tokens are served in a very cost-efficient way.<\/p>\n

So, that's just one example. There are thousands of these companies who are using this platform top to bottom, and our -- the financial benefit for us, we get to play by offering customers the whole stack, if they want to. We can also play in every individual market segment as it grows. As the way that AI is monetized continues to evolve, is it a -- do you monetize the model to an API, do you monetize the model through agents, do you monetize the model by driving more cycles on your data and security platforms, do you monetize by driving more silicon? We get to play in all those markets. And that diversification gives us a lot more capability to reach more customers and more markets, as well as grow.<\/p>\n

Eric Sheridan: <\/strong>Okay. I want to turn to the topic of AI accelerators and how you're positioning your strategy for AI accelerators relative to traditional computing systems. What are the sources of demand you're seeing, and how do you think about meeting that demand with a combination of your own TPUs and external GPUs?<\/p>\n

Thomas Kurian: <\/strong>So we -- you know, we've been in this space for a long time. This is I think our 12th year of building accelerators. There are a number of factors that we're focused on. First of all, there are a variety of different types of accelerators people need for different types of models. You can have sparse models, dense models, mixture of experts. You need sparse cores for certain things. So one type of accelerator definitely does not solve everything that customers need. That's number one.<\/p>\n

Number two, we offer specific silicon for training and specific silicon for inference, because the needs of these systems are quite different. For example, training typically requires a larger scale cluster with different kinds of connectivity across the different nodes of the cluster. Inference typically requires a lot more access to disks, because it's loading data off-disk when it reads and writes. So there's different kinds of silicon we offer for training and inference.<\/p>\n

From a demand point of view, we see different things, from historically it's not just now the AI labs, but many capital markets firms, because they see the efficiency with which their algorithms for numerical trading and research can run on these chips. We see them migrating -- historically high performance computing, which is solid state computational fluid dynamics, et cetera, are also shifting on these platforms, and so we see a range of these.<\/p>\n

And for us the opportunity is to offer this obviously to our Gemini team, and that's our most important priority, continued leadership at the frontier for our models, but we also offer these to our other customers. We offer it in a range of configurations, and some of it runs in our cloud, but we also offer it in other people's data centers, because people want it close to their data, and across every business model we have strong returns in this business.<\/p>\n

Eric Sheridan: <\/strong>Okay, understood. Probably one of the most often asked questions I get from investors is about TPU strategy broadly. How do you as a company think about offering TPU systems to third parties and neoclouds, and how do you think through the return on the invested capital from that activity relative to meeting your own demand needs?<\/p>\n

Thomas Kurian: <\/strong>As we get into more markets, one of the things we realized was there are many places where customers are putting these machines where it needs to sit, near their own systems. So, for example, if you look at high performance computing, people have collected data for years and years, and there's a ton of data. And telling them please copy all that to the cloud in order to reason on it or build a high performance competing application is not viable. So we put our systems in their data centers.<\/p>\n

Similarly, capital markets firms, particularly those that are doing quantitative research, want it close to the venue where they're executing, because from the research they want to execute. So rather than saying please bring all that to our cloud, we say we can put it in your data center.<\/p>\n

Now, we offer two or three types of business models. One is a subscription in our cloud. Second is a capital purchase. When you're buying the system to run in your data center, you buy it as a capital purchase from us, similar to buying a hardware system. And third, we also offer it through Neocloud. In fact, we set one up with Blackstone to offer that as a neocloud.<\/p>\n

The benefit of these things. One is we have diversification of the way that we monetize it. For example, when you buy it as hardware, we don't need to spend capital expense for data centers, because you're putting it in your data center, and so we don't have the responsibility for that power and space, so we don't need to manage that capital expense. We also see strong free cash flow when you buy that to put in your premises. So we see a range of these business models, and we're diversifying it specifically to manage that.<\/p>\n

Just as importantly, we do long-term contracts. So, for example, we're very smart on how we think about pre-positioning inventory. In a number of cases, we may do long-term capital purchases so that the unit cost of components are very efficient for us.<\/p>\n

And third, we are also prepositioning, for example, the way that customers buy and use these systems by making sure they're signing long-term contracts with us.<\/p>\n

So, all of these different elements on the infrastructure side gives us the ability to diversify our portfolio, and because of the strength we have with the product line, we're seeing a lot of demand for it.<\/p>\n

Eric Sheridan: <\/strong>You talked in your presentation around Gemini Enterprise, and at Cloud Next, you talked about it being widely deployed as an agent platform, and you also talked about it being a stimulant for paid user growth quarter-over-quarter. Can you talk a little bit about how Gemini Enterprise is being positioned commercially, how customers are adopting it, and what you see as durable differentiation compared to model-first companies that maybe you're competing with, with something like Gemini Enterprise.<\/p>\n

Thomas Kurian: <\/strong>We have today over a billion consumer users. We have millions of small businesses using Gemini through our collaboration tools and Google Cloud platforms, and we also have very large customers using Gemini to run their core functions in their companies. So, as I said, 90% of the Fortune 100.<\/p>\n

What is it that we do uniquely?<\/p>\n

If you think about a person wanting to use an AI system for building an agent, typically there are four tasks they're trying to do with it:  Write code; analyze data; change of process, for example, change how I do my back office reconciliation for cash accounting; or protect me. And \"protect me\" meaning please protect me from external threats, and please protect me from an agent running amok within my company.<\/p>\n

What Gemini Enterprise does is it applies -- it has three important differentiations. One, it gives you a single agent that provides all of these capabilities. It can analyze data, it can generate content, it can protect you from a security point of view, et cetera.<\/p>\n

Second, in order to do it well, you actually need to hook up the AI system into the internal processes and systems of your company. So, as I said, we do give you tools to understand your metric definitions, so that when we give you a financial answer, it's 100% right. When we give you security defense, rather than saying I can scan all the applications in your company, which you are free to do, but it will take you a lot of time and a lot of resources, we can be very precise on which applications do you prioritize and how do you fix.<\/p>\n

And third, we also understand process definitions in lots of enterprise systems.<\/p>\n

Now, the benefit also is that we give you a choice of model. Many people ask:  Why do you offer a choice in models? Very simple. Take cyber. No single model finds all the issues from a cyber point of view. So if you scan with just a single model, the risk you run is -- think of it as you will be protected from only those vulnerabilities that that model finds.<\/p>\n

More importantly, no model finds a superset of all the other models. If you really want to defend yourself, you have to use multiple passes. One pass with our model, one pass with another commercial model, a third pass with an open source model. And particularly the reason we also say these open sources, many times the attackers are going to use that, so the best way to defend yourself is to figure out what they're going to attack with.<\/p>\n

And so that choice gives you actually better capability than if you just had a monoculture with one model.<\/p>\n

Eric Sheridan: <\/strong>Understood. Maybe just building on that and sticking with cybersecurity for one quick follow-up. How would you see your strategy with respect to cybersecurity evolving specifically to address AI-driven threats?<\/p>\n

Thomas Kurian: <\/strong>Most people asked us when we acquired Wiz, why did we acquire Wiz? We saw in 2023 that as models learned to code, because the most initial skill that models were doing was learning to write code, that they could understand code and configuration of systems, and once they understand code and configuration of systems, they could become extremely proficient in finding vulnerabilities.<\/p>\n

So, we acquired Wiz as a platform because it gives us four things. First, it connects to a lot of clouds, not just ours, but enterprise-wide, and it captures the configuration of your systems and what software is running on those systems.<\/p>\n

It also builds a risk score on which of these applications are most likely to be compromised. The first thing it gives you is an incredibly efficient way to prioritize what you need to look for.<\/p>\n

Second, it allows us to then scan the stuff that you are most worried about, and identify vulnerabilities, and our Gemini platform hooked up to Wiz is being used by many, many companies now to scan and find vulnerabilities.<\/p>\n

Finding vulnerabilities is only half the problem. In fact, it's less than half the problem, because repairing it is the bigger part of the problem. So we built with Wiz a product called CodeMender, which is repairing. The name pretty much says \"code mender.\" It repairs your code.<\/p>\n

And then Wiz also gives you the ability to also test it.<\/p>\n

But that cycle is what has driven over 90% of the Fortune 100 to now adopt our cyber tools to defend themselves from threats due to AI models. You can only defend a threat from an AI model by using a combination of a security platform and an AI system. An AI system by itself cannot protect you. A security platform by itself cannot protect you. You need that combination, and we're uniquely capable of offering that.<\/p>\n

Eric Sheridan: <\/strong>Okay. We have a few minutes left, but I do want to sneak in a couple more topics.<\/p>\n

You recently implemented a strategy that forward-deploys engineers to help with implementation. Talk to me a little bit, Thomas, about the challenges of implementation and the opportunity that sits if you forward-deploy engineering talent to try to help drive a wider array of enterprise adoption.<\/p>\n

Thomas Kurian: <\/strong>We've never been a Services company. In fact, our Services business as a percentage of our total business is the smallest of any hyperscaler. We are a products and solutions company.<\/p>\n

So, where do we use Services and our forward-deployed engineers? Our forward-deployed engineers are focused on three important things. The first one, working with the top-most customers in each industry to identify where to push the frontier of our model. So, for example, in capital markets, it's forecasting. In Legal, it's correctness of the actual results that are being presented by a model, because in Legal, you need to be 100% factual. Otherwise, you will have a problem with the lawyers.<\/p>\n

So, first thing they do is find the frontier.<\/p>\n

Second, they build the tools to allow us to capture the frontier, and what we mean by that is, for example, when we go into a financial market, understanding the actual private data for that company and being able to connect the model with it, our forward-deployed engineers build the tools to do that part.<\/p>\n

We make those tools available to all companies, but they are the ones, because of their expertise, they understand here is a specific thing and here's how we're going to go implement it.<\/p>\n

Third, they build the training and certification program to scale the business through partners. Even this morning, we announced an agreement with Accenture, where Accenture is building a large Gemini Enterprise business group focused on this, and they're working with us, because our goal has never been -- it's always to enable the partner ecosystem, and our forward-deployed engineers learn what customers are doing, build the tools and certifications, and then we scale it through our partners.<\/p>\n

Eric Sheridan: <\/strong>We've only got about two or three minutes left here. Maybe I'll jump to one last final one, which dovetails on the back of what you just said there about Accenture. Google Cloud has announced sort of these new and expanded partnerships in the way in which you're bringing all of these products and Services to market. Talk a little bit about some of the initiatives or the verticals that you're most excited about that contribute to growth as you think about Google Cloud over the next couple years.<\/p>\n

Thomas Kurian: <\/strong>So, we're focused on partnerships in three different domains, okay? First one is in specific industries. We've seen that the needs of specific industries are different. For example, the way that a life sciences company wants to use our models, like what Merck is doing using Gemini Enterprise for both science and for corporate operations. So there are eight industries that we are very focused on pursuing, because we see them as having unique needs that help us advance the frontier. That's number one.<\/p>\n

And in those, we will work not just with leading companies, but also with the independent software vendor and SaaS ecosystems in that market to build solutions.<\/p>\n

Second is the ability to scale the Services community. This is both traditional system integrators, but also new breed AI specialists, and we have that down by market, by country, so that we have it mapped and we have a lot of work going on with that. That's number two.<\/p>\n

Number three, we're also working with specific data providers and people building datasets for specific industries. So, for example, in financial markets, Bloomberg, FactSet -- there's a whole range of them -- MSCI, et cetera, they've put their information in our platform so that people can reason much more quickly on that information, and depending on the domain in life sciences, for example, in healthcare, there are different providers that offer that information, and the goal is to make that information available so that agents and models can reason on them much more quickly and easily, and that's a very focused strategy we have by industry, by country, and by customer segment.<\/p>\n

Eric Sheridan: <\/strong>Alright. Well, I think we're going to leave it there. Please join me in thanking Thomas for being part of the conference this year.<\/p>\n

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