Alphabet Inc - Class C (GOOG) — Q4 2017 Earnings Call Transcript

Thank you. Good afternoon, everyone and welcome to Alphabet’s fourth quarter 2017 earnings conference call. With us today are Ruth Porat and Sundar Pichai. Now, I’ll quickly cover the Safe Harbor. Some of the statements that we make today may be considered forward-looking, including statements regarding our future investments, our long-term growth and innovation, the expected performance of our businesses and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our Form 10-K for 2016 filed with the SEC. Undue reliance should not be placed on any forward-looking statements and they are made based on assumptions as of today. We undertake no obligation to update them. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. As you know, we distribute our earnings release through our Investor Relations website located at abc.xyz/investor. This call is also being webcast from our IR website where a replay of the call will be available later today. And now, I’ll turn the call over to Ruth.

Thanks, Ellen. We had a fantastic 2017 with total revenues of $110.9 billion, up 23% over 2016 and operating income of $28.9 billion up 22% year-on-year excluding the EC fine. Our momentum reflects the relentless focus on users, advertisers and enterprise customers as well as the benefits of our commitment to long-term investing. For the fourth quarter, revenues of $32.3 billion were up 24% year-on-year. The ongoing very strong performance in sites revenue in particular reflects the combined benefits of innovation and secular growth with mobile search again leading the way. Healthy growth in network revenues was again led by our programmatic business. Substantial growth in other revenues, mainly hardware, cloud and Play continues to highlight the benefits of our investments. Our outline for today’s call is, first, I’ll view the quarter on a consolidated basis for Alphabet, focusing on year-over-year changes. In order to facilitate comparisons of this quarter’s results to prior periods, we have also provided the tax affected line items, excluding the impact of the U.S. tax legislation enacted at the end of 2017. You can see the components in our earnings press release. Second, I will review results for Google and then Other Bets. I will then conclude with our outlook. Sundar will then discuss business and product highlights, after which we will take your questions. Starting with the summary of Alphabet’s consolidated financial performance for the quarter. Total revenues of $32.3 billion were up 24% year-over-year and strong across all regions. U.S. revenues were $15.4 billion, up 21% year-over-year. EMEA revenues were $10.3 billion, up 24% year-over-year. In fixed FX terms, EMEA grew 22%, reflecting strengthening of both the euro and the British pound. APAC revenues were $4.7 billion, up 30% versus last year and up 32% in fixed FX terms, reflecting weakening of the Japanese yen. Other Americas revenues were $1.9 billion, up 31% year-over-year and up 30% in fixed FX terms, reflecting strengthening of the Canadian dollar. On a consolidated basis, total cost of revenues, including TAC, which I’ll discuss in the Google segment results, was $14.3 billion, up 34% year-on-year. Other cost of revenues on a consolidated basis was $7.8 billion, up 34% year-over-year, primarily driven by Google-related expenses, specifically, costs associated with our data centers and other operations including depreciation, hardware-related costs for our expanded Made by Google family of products and content acquisition costs, primarily for YouTube. Operating expenses were $10.4 billion, up 19% year-over-year, in particular, reflecting an increase in marketing spend, given the holiday season. Stock-based compensation totaled $1.8 billion. Headcount at the end of the quarter was 80,110, up 2,009 people from last quarter. As in prior quarters, the majority of new hires were engineers and product managers. In terms of product areas, the most sizable head count additions were once again made in cloud for both technical and sales roles, consistent with the priority we place on this business. Operating income was $7.7 billion, up 15% versus last year, and the operating margin was 24%. Other income and expense was $354 million. We provide more detail on the line items within OI&E in our earnings press release. Our provision for income taxes on a reported basis includes $9.9 billion for items associated with the U.S. tax legislation, resulting in a reported net loss of $3 billion and loss per diluted share of $4.35. Excluding the impact of the U.S. tax legislation, our effective tax rate was 15%. Our net income was $6.8 billion and earnings per diluted share were $9.70. Turning now to CapEx and operating cash flow. Cash CapEx for the quarter was $4.3 billion. Operating cash flow was $10.3 billion with free cash flow of $6 billion. We ended the quarter with cash and marketable securities of approximately $102 billion. Let me now turn to our segment financial results, starting with the Google segment. Revenues were $31.9 billion, up 24% year-over-year. In terms of the revenue detail, Google sites revenues were $22.2 billion in the quarter, up 24% year-over-year, led again by mobile search, complemented by solid growth from desktop search and strong performance from YouTube. Network revenues were $5 billion, up 13% year-on-year, reflecting the ongoing momentum of programmatic and AdMob. Other revenues for Google were $4.7 billion, up 38% year-over-year, fueled by hardware, cloud and Play. Finally, we continue to provide monetization metrics to give you a sense of the price and volume dynamics of our advertising businesses. You can find the details in our earnings press release. Total traffic acquisition costs were $6.5 billion or 24% of total advertising revenues and up 33% year-over-year. The increase in sites TAC as a percentage of sites revenues as well as network TAC as a percentage of network revenues, continues to reflect the fact that our strongest growth areas, namely mobile search and programmatic, carry higher TAC. Total TAC, as a percentage of total advertising revenues, was up year-over-year, reflecting primarily an increase in the sites TAC rate, which was modestly offset by a favorable revenue mix shift from network to sites. The increase in the sites TAC rate year-over-year was driven by changes in partner agreements and the ongoing shift to mobile, which carries higher TAC because more mobile searches are channeled through paid access points. The underlying trend affecting the network TAC rate year-over-year continues to be the shift to programmatic which carries higher TAC. Google’s stock-based compensation totaled $1.7 billion for the year, up 1% year-over-year. Operating income was $8.8 billion, up 11% versus last year and the operating margin was 27%. Accrued CapEx for the quarter was $3.8 billion, reflecting investments in production equipment, facilities and data center construction. Let me now turn and talk about Other Bets. I’ll cover results for the full-year 2017 because it remains most instructive to look at financials for Other Bets over a longer time horizon, as discussed on prior calls. Results for the quarter are in our earnings release. For the full-year 2017, Other Bets revenues were $1.2 billion, up 49% versus 2016, primarily generated by Nest, Fiber, and Verily. Operating loss was $3.4 billion for the full-year 2017 versus an operating loss of $3.6 billion in 2016. Other Bets accrued CapEx was $507 million, down from $1.4 billion in 2016, primarily reflecting a reduced investment in Fiber. We’re pleased with our progress across Other Bets. A couple of updates. Nest turned in a strong holiday performance in the fourth quarter across an expanded family of products in energy, safety and security. In 2017, Nest products also became available in 12 new countries, more than double the number in 2016. Verily wrapped up its first field study seeking to reduce the transmission of the diseases through mosquitoes with positive results. And just last week, Onduo, a joint venture between Verily and Sanofi began a limited commercial launch of its diabetes management platform. At Waymo, progress is accelerating. For example, Waymo surpassed 4 million miles of driving in the real world, taking only six months to achieve the last million miles compared to that 18 months for our first million miles. And in November, Waymo announced that it is the only company to have a fleet of driverless cars on public roads that are completely autonomous without anyone in the driver’s seat. Let me close with some observations on our priorities and longer-term outlook. Our 23% revenue growth in 2017 was powered particularly by the ongoing extraordinary performance of our sites business. Both mobile and desktop search continue to grow and benefit from our approach to innovation with strong momentum as we identify additional opportunities to enhance the user and advertiser experience. As we’ve consistently emphasized, alongside the continued momentum in our advertising business, we are focused on building a second wave of growth within Google over the medium and long-term which includes the rapidly growing revenue businesses in Google, cloud, hardware and YouTube. With respect to cloud, we’re seeing the benefits of a fully featured enterprise offering and an expanded go-to-market team, bringing our advantages in infrastructure, data analytics, security and machine learning to more customers. And we are pleased with the momentum in our hardware business in 2017, driven by an expansion in both our product line and geographic availability. Finally, as we look further into the future for our third wave of growth, we remain excited about the longer-term potential for our Other Bets businesses. Overall, operating income was up 22% year-over-year in 2017, excluding the impact of the EC fine, although there was obviously fluctuation in the rate operating income growth quarter-to-quarter. Within cost of revenues, the biggest component is traffic acquisition costs, reflecting our strong revenue growth in mobile search and the fact that mobile search carries higher TAC than our desktop business. While we expect sites TAC to continue to increase as a percentage of sites revenue, reflecting ongoing strength in mobile search, we anticipate that the pace of year-over-year growth in sites TAC as a percentage of sites revenue will slow after the first quarter of 2018. Within OpEx, we are keenly focused on prioritization in order to optimize the resources we’re investing for longer-term growth. As I discussed on last quarter’s call, marketing spend in the fourth quarter is significantly elevated, in particular supporting hardware but also across cloud and YouTube. For 2018, we remain excited about the investments we are making to drive the next phase of growth in our big bets in Google in cloud, hardware and YouTube, and our machine learning efforts which are powering innovation across our businesses. You will see us continue to support our priority areas with increased headcount which will remain concentrated in R&D. With the closing of our deal with HTC earlier this week for example, we’ve added 2,000 employees to support our hardware business. With respect to SBC, we’ve completed the transition to a single annual compensation cycle for employees with a full year equity refresh grant to employees in the first quarter of 2018. Our biannual grant to SVPs will also occur in the first quarter and you will see the combined step-up in our first-quarter results. For our Other Bets in 2018, we will continue to calibrate the magnitude and pace of investment appropriate to their individual execution path. Finally, our framework for capital allocation is unchanged from our prior discussions. The primary use of cash continues to be to support organic growth in the business. We are excited about the significant opportunities we’ve identified in our businesses and continue to invest appropriately. We then layer in a sensitivity analysis regarding potential M&A as well as CapEx, in particular computing infrastructure, to support the needs of these growing businesses. The most sizable catalyst for added investment in compute power includes the expanding application of machine learning efforts across Alphabet as well as additional requirements for Google’s Cloud, Search and YouTube businesses. This framework further considers complimentary uses such as share repurchase. After taking these potential investments into account, our Board has decided to extend our share repurchase program up to an additional $8.6 billion of Class C capital stock. In conclusion, 2017 was another great year and we are very excited about the opportunities ahead. I will now turn it over to Sundar.

Thanks, Ruth. Our teams are off to a great start in 2018. This year is special as it’ll mark 20 years since Google was founded. A lot has changed but our mission of organizing the world’s information and making it universally accessible and useful remains the best guide for the next 10 years. Technology is an incredibly dynamic industry. We’ve been laying a foundation for the next decade as we pivot to an AI-first company, powering the next generation of Google products like the Google Assistant. And we have been making substantial investments in our three biggest bets, cloud, YouTube, and hardware. These bets have enormous potential and already they are showing real momentum and gaining traction. Today, I’ll start by sharing some of the exciting progress in these three big bets. First, Google Cloud. Google Cloud, which includes Google Cloud Platform and G Suite, has reached meaningful scale, and I’m excited to share today that it’s already a $1 billion per quarter business. In fact, we believe that Google Cloud Platform, based on publicly reported data for the 12 months ending December 2017, is the fastest growing major public cloud provider in the world. We are also increasingly doing larger, more strategic deals with customers. In fact, the number of deals worth over $1 million across all cloud products more than tripled from 2016 to 2017. The strength of our products and the value of working with Google is increasingly clear to partners and customers. In the fourth quarter, we forged new and deepened existing partnerships with industry leaders including Cisco for open hybrid enrollments, Salesforce for customer insights and productivity, and SAP for AI and data insights across their products. These collaborations span our entire company from engineering integration to marketing programs to joint sales, and they cover Google Cloud Platform, G Suite, and Google Analytics. We also saw accelerating customer traction on our wins including global brands like Bed Bath & Beyond, Dentsu Aegis Network, Keller Williams, Mattel, and Tyco Retail Solutions. And underscoring the increasing importance of Google Cloud to the enterprise, we surpassed another new milestone, 4 million paying customers on G Suite. Next, YouTube. Every month more than 1.5 billion people come to YouTube to watch their favorite content on channels ranging from The Ellen Show, which has more than 22 million subscribers, to the NBA with over 8 million subscribers, to SciShow, a really popular educational channel with more than 4.5 million subscribers. In fact, there are over 1 billion learning-related video views every day on YouTube. With all this great content, people are thinking of YouTube more as a key part of their TV viewing experience. For Tuesday night’s State of the Union, more partners used YouTube to live stream the address than ever before, generating 5 million live views. And just yesterday, we announced a partnership with Major League Soccer’s LA Football Club; YouTube TV will be the exclusive home to watch all locally televised English language matches in addition to their original programming and content. YouTube TV is now also available on Roku. There is great momentum around the world with localized versions of YouTube now in 90 countries in 80 different languages. Just this morning, we announced that we are expanding the popular YouTube Go app to over 130 countries around the globe. The app has great data usage transparency and controls built in, which is especially useful for people living in regions with limited connectivity. In the fourth quarter, we also strengthened our relationship with the music industry, signing new licensing deals with Sony Music Entertainment and Universal Music Group. We also partnered with Ticketmaster to help fans buy tickets to see their favorite artists perform live. Third, our growing hardware business. Our Made by Google hardware products were very popular this holiday season. Device shipments in the fourth quarter have more than doubled year-over-year. Our retail partners also saw strong performance. Our devices are available in stores like Best Buy, Target, and Walmart. I’m especially excited about the popularity of our Google devices for the home like the Google Home, Mini, Max and Chromecast. In the last year, we have sold tens of millions of these devices and counting. I want to call out the great work of our marketing and design teams. Our hardware is beautiful individually and as a family, and people love discovering the unique features like the built-in Google Assistant. Earlier this week, we officially closed our deal with HTC, which will bring great talent to drive even more innovation in the years to come. Turning to our efforts in machine learning. Our AI research and innovation leads the world. Our mission to better organize the world’s information has been transformed by these technologies with our Search products and the Google Assistant at the heart. There is great momentum around the Google Assistant as we bring it to more people on more devices. It’s now available on more than 400 million devices including speakers like Google Home as well as Android phones and tablets, iPhones, headphones, televisions, watches and more. People love to use the Assistant on all these devices. There was a lot of excitement around the Google Assistant at CES from partners and consumers where we brought the Assistant to new surfaces like smart displays from brands like JBL and Lenovo as well as Android Auto which is now available in more than 400 car models from brands like GM, Hyundai, and Volvo. One area that’s really benefiting from our advancements in AI is photography. The Pixel 2 phone is the leader in video rankings by industry standards, with smoother and clearer videos, thanks to machine learning and our video stabilization technique. And Google Photos continues to grow from strength to strength. On New Year’s Eve alone, over 3 billion photos and videos were uploaded to Google Photos. More broadly, we want everyone to be able to use machine learning for their own needs. We recently gave Google Cloud customers access to AutoML, which makes it far easier to build complex new applications. Since it launched a few weeks ago, over 10,000 customers have already signed up to try it. Lastly, I’ll give a quick update on our computing and advertising platforms. First, Android. To provide a better, more tailored experience for our next billion users, we made Android Oreo Go edition available for our device partners. This year, we expect to see Go devices from dozens of manufacturers and with great support from mobile operators and app developers around the world. I’m confident that this will bring the power of smartphones to many more people for the first time. Google Play is also growing well. Just last week, we introduced audiobooks, so you can now catch up on your favorite books anytime on multiple devices. And in Latin America, the number of unique monthly buyers on Google Play grew by over 50% year-over-year in 2017. Chromebooks also continue to gain momentum and traction. Third-party research tells us that fourth-quarter sales of consumer Chromebooks in the U.S. grew by over 70% year-over-year. Moving to our advertising platforms which help large and small businesses. As shoppers turned to their mobile phones this holiday shopping season, Google was central to helping them discover new brands, compare products and find the best deals. We redesigned the mobile shopping experience on Google, bringing more product information to the forefront like reviews and ratings. We are also making the payments experience simpler, safer, and more consistent. We brought our payments efforts together as a new Google Pay, which shoppers can use to pay online, in stores, and across Google products like Chrome and the Play Store. Companies like Airbnb and Instacart are using Google Pay to speed up mobile checkout. And HotelTonight found that customers using Google Pay are 65% more likely to complete their bookings. We also have really strong momentum in app promotion ads. The majority of our app promotion campaigns are now using Universal App campaigns, which is part of our focus on simplifying the advertiser experience. Additionally, we introduced a new playable ad format in Google Play that allows users to sample games before they install. Ads in Google Play are performing really well for developers. And our app promotion business on YouTube is flourishing. We launched major initiatives such as store visit measurement and location-based ad formats to drive online to offline commerce. We are focused on making sure YouTube is a great place for users and advertisers while helping creators earn money from popular content. In addition to the significant work we are doing to protect users and stop abuse on the platform, just a few weeks ago, we announced changes to advertising on YouTube, including stricter monetization criteria, new manual reviews for all videos in Google Preferred, and simpler controls for marketers. The feedback we have received from advertisers and creators so far has been really positive. So, as you can see, we are making great strides in our biggest bets, and I’m proud of the work we are doing across the company. I’m also incredibly proud that as Google grows, we are making significant contributions to our partners, the economy, and our local communities. Our business continues to benefit our partners around the world. This includes news publishers, app developers, and YouTube creators, whom we share revenue with. Over the last four years, our partners have earned over $100 billion; that’s incredible and we are working on new ways to drive even more value to our partners. In the U.S. specifically, we have offices and data centers across 21 states, and we plan to hire thousands of people across the U.S. this year. Last year in the U.S., we grew faster outside the Bay Area than in the Bay Area. To support this growth, we will be making significant investments in offices across nine states, including Colorado and Michigan. We will also be building or opening five big new data centers in the U.S. And with digital skills in high demand by employers, our Grow with Google initiative will help job seekers and small businesses gain education and skills to succeed. Just a couple of weeks ago, we announced that we are creating an IT support certification program that will give thousands of people scholarships and job opportunities. More than 10,000 people have already signed up, which is amazing. I want to thank all our employees, Google users, partners, and advertisers around the world. I couldn’t be more excited about what’s in store for all of us this year. With that I’ll hand it back over to Ruth.

Thank you, Sundar. And we will now take your questions.

Thanks for taking my questions. Maybe two, one for Sundar and one for Ruth. Sundar, coming out of CES and the success you had with Google Home and the Google Assistant during the holiday period based on the blog post you guys put out, can you identify some of the key investments in either partnerships or hardware or capabilities that you’re targeting over the next one to two years to make sure the momentum around Assistant is sustained? And then, Ruth, looking at cost of goods sold that came in quite a bit higher than we thought, and you were lapping a one-time charge, if we have it right, versus the year-ago period. Maybe you could talk a little bit about some of the pressures in cost of goods sold that were either seasonal or maybe a new normal in terms of a higher level, going forward? Any color there would be really appreciated.

On the Google Assistant and Google Home, we are very excited about the momentum we saw at CES. It reflects the work we’ve been doing for a while. Google Assistant, in some ways, brings together all the technology we’ve been building for years, and it’s an extension supported by Google Search as well. We are also thinking about our capabilities broadly beyond just one device alone, and that’s what we are doing here across phones, and across all surfaces. So, that’s something big we’re focused on. And the second is we have always built ecosystems, be it Android or Chrome or Chromebooks. We work with many partners and scale up things, right. And so, we are leveraging those best practices and trying to build this in a way in which the entire ecosystem can ship products with the Google Assistant and generate value. So, I think the framework is great, and long-term, our investments in AI will directly manifest its capabilities for users through the Google Assistant. So, I’m very bullish on it.

And then, in terms of gross margins, it obviously reflects our product mix. And as you know well, the TAC rate for each of sites network as a percentage of revenue lines, that’s continued to increase because they’re our strongest growth areas, namely mobile search and programmatic and so carry higher TAC. But, as I indicated in my opening comments, we do estimate that the year-on-year increase in the sites TAC rate will slow after the first quarter of 2018. And then, the other thing to note, other cost of revenue does reflect the seasonality of hardware, having increased both the number of products and the Made by Google family as well as continuing to expand geographically in Western Europe and APAC, you can see that reflected here.

Two quick questions, one for Ruth, and Sundar. I guess, Ruth, just to follow up on your comments there, the partner agreements which you just cited. Is there any color you could give us on how these typically work? And what I mean by that is are they typically multiyear deals on average? And how do we think about these impacting the rate of change in TAC, since you are talking about the pace of growth in TAC as we look out, call it in year two, if these are multiyear deals? And then, for Sundar, I guess, I wanted to follow up a little bit with what we saw at CES. But, how do you think about voice? And given the significant number of devices in the market, how do you think in the future about traffic acquisition strategies on these devices, as you look five years down the road? Is there any reason to think that the strategies might be different that you are going to follow as you look ahead, than what we’ve seen over the past, call it since the advent of the iPhone? Thank you.

So, on your first question, there is not much really that I’m going to be able to add there. I mean, given the ongoing momentum in our mobile search business, this does continue to be relevant, as you look forward, given mobile carries higher TAC. But, the rate, as per your question, has also reflected changes and partnership agreements. So, all factors considered, we expect the year-on-year increases will slow after the first quarter of ‘18. And as I’ve said on many of these calls, we are very pleased to have a very strong position in a rapidly growing market and that momentum does continue. I guess, the only other thing to add is that Q4 TAC as a percentage of revenue does benefit from the fact that the fourth quarter is a seasonally strong quarter for YouTube. So, quarter-on-quarter changes are less insightful because CAC is distinct from TAC. It’s not in this number but not much more to add there. Pass it to Sundar.

We are very excited about voice technology, and we see strong adoption in countries like India, where it significantly contributes to mobile search queries. Innovations like Google Assistant and Google Home are driving this trend. Additionally, we see an increase in multi-modality, as evidenced by the announcement of several smart displays at CES. We believe this will be an exciting development going forward. Our goal is to be available for users whenever they need us, and to serve everyone effectively. This commitment is reflected in our work across the ecosystem, including first-party devices and global initiatives. We will continue to approach search with the intention of serving all users, and I don’t anticipate a major shift in our strategy.

Some big news earlier this week just in terms of Waymo with FCA talking about delivering thousands of minivans to Waymo later in the year. So, I was hoping Ruth, you could just talk to us more about the timing for that business and how we should think about the economic model there, as you move to operations and deployment phase. And then, secondly, the cash now obviously much more accessible in terms of what is held overseas, could you just talk more about your plans there? Obviously, the bigger buyback there but still not meaningful in terms of the overall size of the company.

Sure. First, regarding Waymo, we are very enthusiastic about the potential with Waymo and our ongoing advancements across various areas, particularly the rider program in Phoenix, which we are eager about as we broaden our testing to additional states. In November, we achieved a significant milestone with Waymo’s self-driving technology, becoming the only company with a fleet of fully autonomous driverless cars operating on public roads. This complements our extensive experience of over 4 million test miles conducted in real-world scenarios across seven states and 25 cities in the U.S. Currently, we are driving fully autonomous vehicles for about 10,000 miles each day, supported by billions of miles of simulation and thorough testing at our private facilities. In response to your question, we are actively investigating various options beyond the Phoenix pilot, including ride-sharing, personal vehicles, logistics, and working with municipalities to fulfill their public transportation goals. Our first commercial application will be the ride service we plan to launch in 2018, available to the public in Phoenix. Riders will use the Waymo app to request one of our completely autonomous cars without a driver present. We are very excited about this development. Regarding cash, we want to emphasize that our approach to capital allocation remains unchanged. We have consistently prioritized long-term investment, as discussed earlier in this call, and our framework has been stable. Our primary focus is organic investments in numerous opportunities, followed by strategic acquisitions, particularly smaller M&A deals to bolster our cloud and hardware sectors. The recent HTC acquisition is a prime example of this strategy. Thirdly, we are investing in capital expenditures to support growth throughout Google, especially in Cloud, Search, YouTube, and machine learning initiatives. This leads to our return on capital considerations, which has prompted the Board to extend our share repurchase program, a continuation of what we announced a couple of years ago. We will leave the specifics for you to interpret in true Google style, but it represents a modest increase from our previous activities.

I have two. The first one, Ruth, you called out desktop search, I think the second straight quarter as being relatively strong. Could you just talk about some of the drivers of the strength in desktop? And how do you think about the sustainability of continued strong desktop growth in 2018 and beyond? The second one kind of a question on search query volume. There is often speculation and question marks around how consumer behavior is changing in e-commerce and whether Google is still capturing as many e-commerce searches. Could you just talk to what you are seeing in retail search query volumes and search user growth within e-commerce in the United States?

Overall, Search is very extensive. We cover numerous categories, including travel, hotels, services, and products. Our approach is quite comprehensive. E-commerce is rapidly evolving, and we are continuously investing in that area. Google Shopping is performing well, and we strive to ensure a top-notch experience. For instance, we collaborate with companies like Walmart to facilitate easier product purchases. We are aware that consumer behavior is changing, but we are confident in our broad capabilities and our commitment to enhancing user experience.

And on your question on desktop, there really isn’t one particular item to call out here. And that’s why last quarter, I tried to walk through the process that our team goes through and the way they look at innovation, really stepping back and recognizing that the way we all use smartphones and desktop is continuing to evolve. So, therefore, there is utility in challenging assumptions about evolving user behavior and advertiser preferences, and that opens new lines of inquiry which benefits not just mobile but also desktop. And desktop did deliver solid revenue growth. It does remain an important form factor for certain more complex tasks such as planning vacations or assessing insurance options. And we are pleased with the ongoing strength. I’ll leave it to you to do any of the forecasting. But, we just view it as yet another valuable form factor and are really pleased with the performance there.

Thanks for taking my questions. One for Sundar and for Ruth. Sundar, on YouTube, you mentioned that 1.5 billion people come to YouTube. Any other information you can give us there on user growth or engagement trends would be great, anything on time spent, I mean particularly as YouTube becomes more mature and mobile video particularly in North America gets more competitive. And then, also on YouTube, anything around new products or features driving the monetization or ad business? And then, Ruth, just a question on the growth in marketing spend in the fourth quarter. I think you said that the fourth quarter was significantly elevated. Should we interpret that to mean that the growth rate in selling and marketing year-over-year should decelerate off the fourth quarter? And then, just related to that, you’re getting a good return on investment from this marketing spend, particularly when you think about media mix and all the spend that we’ve seen on TV compared to digital marketing?

On YouTube, we are seeing great momentum. One area that highlights its success is YouTube on TV; there has been significant growth in people wanting to watch YouTube on the big screen. As a result, people are using YouTube for a wide range of purposes. I mentioned earlier that we have over 1 billion users engaging with educational content daily. Additionally, people are utilizing it to catch up on sports, music, and entertainment. Historically, YouTube has performed very well on mobile and continues to excel in that area, particularly in emerging markets. Last year, our growth was robust in those regions, which is why we invested in initiatives like YouTube Go. We are now witnessing strong growth beyond mobile, especially in living rooms, indicating a lot of momentum there.

And then, in terms of sales and marketing, as I said, it particularly supported hardware but was also supporting Cloud and YouTube. And as both, Sundar and I’ve said, these are important Google growth areas for us and we are investing to support growth in the business. The elevated levels this quarter did reflect both seasonality and strategic decision to invest in these brands. And so, view it as a very important part of the overall investment and what we view as very sizeable opportunities. And it’s both supporting the brand and the momentum therefore going into 2018, but this is very specific product focus as well.

Sundar, I’ll go with the European theme. First, curious to hear your thoughts on the potential impact of GDPR, maybe both on your own sites and properties and how any business practices may need to be adjusted for that but also for tools like customer match that you or advertisers may use. And then, second, I’ll take a shot at it. Any updates on your dialogue with the EU officials and regulators on the proceeding there?

Good question. I was in Europe last week, and it was exciting to be there. We definitely feel momentum in how Europe is performing, and we are committed to the region. We're opening new offices and have announced an AI center, and we plan to hire more engineers and supporting staff there. It’s an important market for us. Regarding GDPR, we have been thoughtfully engaged. It's crucial to prioritize privacy for European citizens, and we fully support the ongoing efforts. We are dedicated to complying with GDPR across all our services in Europe. There is still time, as it doesn’t go into effect until around May, and we are ensuring all our products are ready. We will work diligently to make a smooth transition. We have had constructive conversations with the European Commission, understand their concerns, and are responding with thoughtful changes. We will continue to engage in a considerate manner.

First, Sundar, your comments on Google Cloud were upbeat. And I wonder how much of the momentum there is related to machine learning capabilities offered as a service. If you could frame just how important that is for the cloud business overall? And then, as a follow-up on Google Home or the voice-based assistant. If there is any update on how you are thinking about monetization from a transactional perspective, transactional model with perhaps retail partners or do you see an ad-based model emerging there as well?

On the topic of cloud, especially last quarter, we introduced AutoML to our Google Cloud customers. This indicates the speed at which we are implementing our internal advancements. Just a year ago, I reviewed the AutoML work with the team; we discussed it at Google I/O, and it's quite innovative. Providing this for everyone globally demonstrates the potential of what we can achieve with Google Cloud, making our state-of-the-art technology accessible. The momentum is largely due to our expertise in machine learning, our open and agile development environment, security measures, and the integration with G Suite. Importantly, we've been in the cloud space for 19 years since Google's foundation is based on a cloud platform. Recently, we have focused on ensuring we are ready for enterprise-scale operations, allowing us to manage any type of enterprise, regulatory, or security complexities. This is reflected in our significant business wins. We are securing large customers worldwide, which is boosting our momentum. Regarding Google Home and the voice-based assistant, there are many exciting ideas we are exploring internally. The teams are eager to experiment, and we see considerable potential. However, I have advised the teams to prioritize user experience. We are just beginning, and we believe these technologies will be powerful. Yet, we recognize areas where we need to improve to meet user expectations. Therefore, we will be concentrating on enhancing user experience in this space for the foreseeable future.

One question for Sundar and one for Ruth, both regarding YouTube. The first question is about Google Preferred and the types of qualities that meet the criteria for your videos. Do you feel the need to take a more proactive approach in assessing what is included in YouTube Preferred, and how do you plan to do that? And for Ruth, reflecting on the past year, we have heard a lot about brand safety. Looking back at the YouTube results from 2017, are there any noticeable trends indicating a shift in ad spending from brands that previously expressed concerns? Those are my questions.

I probably can talk about both as they’re related. We obviously want to make sure YouTube has a great experience for users, content creators, and advertisers because it supports content creators. And we took a lot of steps last year but particularly in December we adopted a new rigorous approach. And that’s a much more stringent standard for creators. For example, they need 1,000 subscribers to be eligible for monetization. We are manually reviewing Google Preferred videos. We obviously use machine learning to support that a lot and they both go hand in hand. We have provided improved controls for marketers and we are also working with trusted third-party vendors to assist brand suitability. So, it’s a comprehensive approach to make sure all of this works well. And so, while there have been concerns but we are working really hard to address them and respond strongly. And so, I think we’re focused on the long-term opportunity here and I think we are setting ourselves up well for the years ahead.

So, just a question, searches seem to be coming more qualified through travel as far as filtering the price that people want to pay, locations, amenities et cetera. Is there any trend that goes along with that in terms of maybe depressing search volume growth to some extent because of the more filtered aspect? And then, secondly, does the higher qualification trend tie in at all to the shifts towards programmatic and in terms of other parties that might be involved or the discussion that we had around TAC? And then, maybe two, just as a follow-up, if you can provide just a little bit more color on Google Pay in terms of what might be different in this round versus previous attempts?

Maybe I’m not fully sure I understood all the specifics there. But, at a high level, as people are on the go, they are traveling, etc., if anything, I think search is more invaluable than ever before. All the work we do in local searches applies incredibly when you travel; the properties we have like Google Maps, etc., go along with it. So, overall, I think they all add up to a better user experience and hence a better opportunity for us. Google Pay turns out to be an important part of all of this. As we move from just answers to helping users complete actions about time including transactions, the ability to complete the transaction is an important part of it and which is why making sure Google Pay in a unified way works as seamlessly as possible is a big part of our long-term strategy.

So, Sundar, I think Ruth cited hardware in the prepared remarks as the largest contributor in the fourth quarter for the other revenue line. As you look at the roadmap going forward, you acquired the HTC engineers to bring that team in-house. So, looks like for the first time you have an integrated hardware and software team under one roof. So, how do you think your product development pace and strategy will change for smartphones and other devices going forward? And also, does it make sense to bring the Nest team to be more integrated into core Google as well given the drive to increase the touch points for all the Google products to other form factors?

You are right that part of the reason we are so excited about being able to bring this world-class team in-house is while we have been working together already, we have had to straddle a company boundary to do that. But now, having them as Googlers, will really make that integrated development, which is so critical for us to do it better. We bring a unique approach to hardware, the combination of AI plus software plus hardware. So, being able to get those teams working together, I think would really drive the pace forward. And the best example of that is you see the advances we have made with both still and video photography on our phones. And the Nest team is very, very closely aligned with the Google hardware team. They work hard to realize a lot of synergies there. We already shared a lot of our go-to-market efforts. And we increasingly are collaborating on product development as well. So, we collaborate closely, and I’m excited at the possibilities there as well.

First for Sundar, it didn’t feel like there are many visible search changes this year as far as coverage or ad formats? So, I would love to hear your thoughts on search innovation pipeline as you look at 2018 and key growth drivers going forward? And then, Ruth, in the prepared remarks, there was a lot of comments on investment in your medium-term business growth drivers, offices, data centers, and other areas. And I’m just wondering if you view 2018 upcoming as an investment year or kind of more of the same of what we have seen over the last couple of years?

Justin, when considering Search, it's helpful to think about user journeys. Much of our innovation focuses not just on individual queries but on understanding what users aim to achieve over multiple interactions. Whether it's planning a trip more effectively or seeking information about health-related topics, we're striving to enhance the user experience throughout that journey. This means not just altering specific formats but improving our understanding of context and delivering relevant information. Our goal is to assist users in accessing information and taking action based on it. For instance, if you discover something new, we want to support you in making a call or purchasing a birthday gift. This integrated innovation is taking place across both search and assistance.

And then, in terms of your investment question, we’ve consistently been investing across Alphabet, and we have tried to be very clear about our investment priorities, all with a view to supporting healthy, long-term growth that goes back to the inception of the company. Year-on-year op inc growth that you have seen does include these sustained investments for all the areas that both Sundar and I have talked about, for the year up 22% versus last year. Obviously, a lot of variability in growth quarter-to-quarter. And that we just continue to be focused on doing the right things to support growth of the business. The fourth quarter does reflect the obvious seasonality. And again, we continue to look across various, their needs and try and prioritize that we can remain committed to long-term growth.

Just a couple of questions. Can you discuss the evolution of the business model for Waymo? You are launching the ride-hailing service in Phoenix, you’ve worked with manufacturers. You talked about other models. But, when you think about the sort of five to ten-year view of that, what will the primary business model look like? And separately, can you talk about what is interesting from a strategic point of view about the video game business? You are making some key hires there, and just wondering what you think Google can bring to that industry that would be innovative.

On Waymo, there's not much more to add. We’re really pleased after years of focusing on safety and developing the technology and platform. Now, we have the opportunity for people to use and benefit from what we've created. Safety has been a key driver, and the potential benefits for cities regarding resource optimization are exciting. It's still early days, and we’re pleased with the progress the team has made. However, it would be premature to speculate beyond what we've already outlined.

On the video gaming side, we currently have significant momentum in these areas, particularly with YouTube as a platform and Google Play. These assets are performing well, and we will continue to invest in them. There is nothing new or notable to share at this time.

Thanks, everyone, for joining us today. We look forward to speaking with you again on our first-quarter call.