Alphabet Inc - Class C (GOOG) — Q2 2018 Earnings Call Transcript

Thank you. Good afternoon, everyone, and welcome to Alphabet’s second quarter 2018 earnings conference call. With us today are Ruth Porat and Sundar Pichai. Now, I’ll quickly cover the safe harbor. Some of the statements that we make today may be considered forward-looking, including statements regarding our future investments, our long-term growth and innovation, the expected performance of our businesses and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our Form 10-K for 2017 filed with the SEC. Undue reliance should not be placed on any forward-looking statements, and they are 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.

Thank you, Ellen. We delivered another quarter with strong operating performance, reflecting our focus on building great experiences for users, advertisers and enterprise customers around the world. In aggregate, we had substantial revenue growth, up 26% year-on-year and up 23% in constant currency. Sites revenues continued to exhibit strong year-on-year momentum, benefiting from innovation and secular growth with mobile search again leading the way. Our network advertising business maintained healthy growth, led by AdMob and programmatic advertising. The businesses comprising other revenues, namely Cloud, Play and Hardware again had substantial growth. Our outline for today’s call is I’ll begin with results for the quarter on a consolidated basis for Alphabet, focusing on year-over-year changes. There are two items to note in our earnings press release. First, we provided a table to highlight the impact of the European Commission fines on operating income, net income and EPS results in the second quarters of 2018 and 2017. Second, as discussed last quarter, our results are affected by the new accounting standard that changes the way companies account for equity security investments. This new standard continues to result in greater volatility in Other Income and Expense. I’ll highlight the impact on particular line items, as I review the quarter. I will then review results for Google followed by Other Bets and will conclude with our outlook. Sundar will then discuss business and product highlights, after which we will take your questions. Starting with the summary of Alphabet’s consolidated financial performance for the quarter. Our total revenues of $32.7 billion were up 26% year-over-year. We realized the positive currency impact on our revenues year-over-year of $768 million or $665 million after the impact of our hedging program. Turning to Alphabet revenues by geography. You can see that our performance was strong again in all regions. U.S. revenues were $14.9 billion, up 21% year-over-year. EMEA revenues were $10.8 billion, up 26% year-over-year. In constant currency terms, EMEA grew 19%, reflecting strengthening of both the euro and British pound. APAC revenues were $5.1 billion, up 36% versus last year and up 34% in constant currency, reflecting strengthening of the Japanese yen and Korean won. Other Americas revenues were $1.8 billion, up 31% year-over-year and up 34% in constant currency, reflecting strengthening of the dollar relative to the Brazilian real. On a consolidated basis, total cost of revenues, including TAC, which I’ll discuss in the Google segment results, was $13.9 billion, up 34% year-on-year. Other cost of revenues on a consolidated basis was $7.5 billion, up 41% year-over-year, primarily driven by Google-related expenses. The key drivers were costs associated with our data centers and other operations, including depreciation, which continued to be affected by a reallocation of certain operating expenses and content acquisition costs, primarily for YouTube, followed by hardware-related costs. Operating expenses, including the impact of the EC fine, were $16 billion. Excluding the impact of the EC fines, operating expenses were $10.9 billion in the quarter, up 24% year-over-year. Once again, the biggest increase was in R&D expenses, reflecting our continued investment in technical talent. The growth in sales and marketing expenses reflects increases in sales and marketing headcount, primarily for Cloud, followed by advertising investments in Cloud and the Assistant. General and administrative expense trends in the second quarter were affected by a number of factors, in particular, performance fees accrued in connection with the recognition of equity security gains, which were again partially offset by the reallocation of certain expenses from G&A, primarily the other cost of revenues. Stock-based compensation totaled $2.4 billion. Headcount at the end of the quarter was 89,058, up 4,008 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 headcount increases were in Cloud for both technical and sales roles. Operating income was $2.8 billion. Excluding the impact of the EC fines, operating income was $7.9 billion, up 15% versus last year, for an operating margin of 24%. Other income and expense was $1.4 billion, which includes $1.1 billion of gains in equity security investments. We provide more detail on the line items within OI&E in our earnings press release. Our effective tax rate was 24.2% for the second quarter, reflecting a sizable impact from the non-deductibility of the EC fine. Net income was $3.2 billion and earnings per diluted share were $4.54. Excluding the impact of the EC fine, net income was $8.3 billion and earnings per diluted share were $11.75. Turning now to CapEx and operating cash flow. Cash CapEx for the quarter was $5.5 billion, which I’ll discuss in the Google segment results. Operating cash flow was $10.1 billion with free cash flow of $4.7 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 $32.5 billion, up 25% year-over-year. In terms of the revenue detail, Google Sites revenues were $23.3 billion in the quarter, up 26% year-over-year. In terms of dollar growth, results were led again by mobile search with strong contributions from both YouTube and desktop search. Network revenues were $4.8 billion, up 14% year-on-year, reflecting the ongoing momentum of AdMob and programmatic. Other revenues for Google were $4.4 billion, up 37% year-over-year, fueled by Cloud, Play and Hardware. We continue to provide monetization metrics in our earnings press release to give you a sense of the price and volume dynamics of our advertising businesses. Total traffic acquisition costs were $6.4 billion or 23% of total advertising revenues and up 26% year-over-year. Total TAC as a percentage of total advertising revenues was up year-over-year, primarily reflecting an increase in the sites TAC rate, which was 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. This quarter, we experienced a year-on-year decline in the network TAC rate as a result of the favorable mix shift within our programmatic business. Google stock-based compensation totaled $2.3 billion for the quarter, up 21% year-over-year. Operating income was $9 billion, up 17% versus last year and the operating margins was 27.6%. Accrued CapEx for the quarter was $5.3 billion, reflecting investments in production equipment, data center construction, and facilities. Let me now turn and talk about Other Bets. Other Bets revenues were $145 million, primarily generated by Fiber and Verily. Operating loss was $732 million for the second quarter. Other Bets accrued CapEx was $10 million. We’re pleased with our progress across Other Bets. A couple of updates. Waymo expanded its partnership with Fiat Chrysler with the option to add up to 62,000 Chrysler Pacifica minivans to its self-driving fleet. And lastly, Waymo announced that it has driven more than 8 million fully autonomous miles with most of those on city streets. A couple of weeks ago, X announced that Loon and Wing have graduated to become independent companies under Alphabet. Graduation from X signals that these companies have reached certain technical and business milestones and that their focus is shifting toward commercialization. And just last week, Loon indicated that it is partnering with Telkom Kenya to launch commercial service in regions of Kenya by early 2019. Let me close with some observations on the quarter and our longer-term outlook. First, with respect to revenues. We’re pleased with the ongoing momentum in our advertising businesses. As discussed previously, we continue to identify new opportunities through innovation, including the benefits of applying machine learning to create more useful experiences for users and advertisers. Looking ahead, our hardware business is seasonal, typically experiencing lower growth in the third quarter in anticipation of the launch of new products for the holiday season. Second, with respect to profitability. Within cost of revenues, the biggest component is TAC. As we’ve discussed for the past couple of quarters, we expected the pace of year-on-year growth in sites TAC as a percentage of sites revenue would slow after the first quarter of 2018, and you can see that clearly in our results of this quarter. As frequently discussed, we do expect the sites TAC rate to continue to increase year-on-year, reflecting ongoing strength in mobile search, albeit at a more moderate pace relative to the year-on-year increases experienced over the past several quarters. Within OpEx, we continue to take a disciplined approach to setting priorities as we invest for the long-term growth. The majority of our headcount growth continues to be in technical roles and engineering and product management. In terms of business areas, the largest number of headcount additions were in our Cloud business with hires for engineering, sales, and marketing. As a reminder, headcount additions tend to be seasonally higher in Q3 because that is when we bring our new graduates. As I mentioned last quarter, regarding sales and marketing, we continue to expect expenses to be more heavily weighted toward the back half of the year to support the holiday season. Another factor to consider in year-on-year comparisons next quarter is the timing of two expense items in Q3 last year. As we called out last year, there was a meaningful benefit in the third quarter of 2017 from the shift in timing of our annual equity refresh and also from the timing of sales and marketing spend which was more heavily weighted to the fourth quarter. For our Other Bets, we remain focused on making progress on a number of commercial opportunities across the business, while continuing to manage investment against achievement of key milestones. Third, with respect to CapEx. As I discussed with you last quarter, our commitment to growth is evident in the ongoing trend in CapEx investment. We’ve been investing meaningfully in search and ads consistent with the opportunities we see to benefit the user and advertiser experience. And we are investing in the additional compute power required to support growth in the number of YouTube users globally. We’re also investing in new businesses that are growing at a rapid pace and have sizable compute needs, most notably Cloud. The investment pace also reflects the importance of machine learning across all of our products including search and ads. Although machine learning is more compute-intensive, it is increasingly core to businesses across Alphabet, and opens up the possibility of accelerated innovation in products and services. And keeping with our approach across Alphabet to invest thoughtfully for long-term value creation, we remain focused on both performance and cost-effectiveness. I will now turn the call over to Sundar.

Thanks, Ruth. It’s been a busy few months at Google, and we showed a lot of what we are working on at events like Google Marketing Live, Brandcast, and of course our annual developer conference, Google I/O. It was exciting to have millions of people join us in person and via live stream. Tomorrow, I hope you’ll tune in to Google Cloud Next where the great momentum and innovation in our cloud business will be fully on display. The common thread you’ll hear on today’s call is the benefit of machine learning and AI, and how it’s improving our products and generating great results for our users and partners. I also hope that everyone enjoyed the World Cup as much as I did. I know our French Googlers were very excited. I loved the competition and was extremely proud to see positive feedback about how useful Google Translate was for people who traveled to Russia. The app translates about 143 billion words a day. And during the World Cup, we saw a huge bump in volume. In the simple moments when you’re in an unfamiliar place or you don’t know the language, Google is there to help with the right information at the right time. This is what we aspire to be best at, and it’s why billions of people continue to put their trust in our products. Today, I’ll start with how AI is enabling us to advance the mission of making information accessible and useful to everyone in new ways. Then, I’ll share updates on our computing, video, and advertising platforms which are helping our partners succeed and grow. And finally, I’ll talk about our growing cloud business. Let’s begin with AI helping our mission. We revamped the Google News app in May to create reviews. It uses machine learning to highlight top stories organized for users, exploring topics more deeply with articles from a range of clustered news sources. We believe in the need to deliver high-quality information and news to users, and to support the news industry as we do so. The Google Assistant is another great product based on machine learning. By the end of this year, it will be available in more than 30 languages and 80 countries. We have worked with partners to expand the number of smart devices that are now compatible with the Google Assistant like doorbells, dryers, refrigerators and more, and connect with more than 5,000 devices in the home. At Google I/O, we also highlighted how AI is improving Google Maps, including enhancing the experience with Assistant and AR features. Through our improvements in machine learning, we have seen a 25x increase in our ability to build maps algorithmically, and we have added 110 million algorithmically drawn buildings to Maps since the beginning of this year. And with over 1 billion users, we’re continuing to see tremendous growth in maps with especially strong growth in countries like Indonesia, India, and Nigeria, each of which is growing over 50% year-on-year. There are many more great AI-powered features we rolled out this quarter including the new version of Gmail with Smart Compose, a new feature that helps users craft emails faster. And Google Photos now suggests actions to help you brighten, share, rotate or archive a picture. Next, our computing, video, and advertising platforms. These platforms are providing real economic opportunities for developers, creators and publishers in every corner of the globe. Last year, I announced that in the three-year period from 2014 to 2016, we paid out over $15 billion in revenue to our creators, publishers and app developer partners in Europe, Middle East and Africa via AdSense, YouTube and Google Play. Our contribution is accelerating. In 2017 alone, we generated an additional $7 billion for these partners. First, our computing platforms. Ten years ago, we launched the first Android phone with a simple idea to build a mobile platform that’s free and open to everyone. Today, there are more than 24,000 devices at every price point from more than 1,300 different brands. The Android ecosystem supports thousands of phone makers and mobile network operators who build and sell Android devices. Millions of app developers around the world have built their businesses on Android and billions of consumers can now afford and use cutting-edge Android smartphones. This is all supported by a business model that encourages and enables this open ecosystem to thrive. Continuing this momentum, at I/O, we unveiled a plethora of new features throughout the Android platform, like battery saving features in Android P, new Google Assistant capabilities on Wear OS, the new Android model to help developers optimize for a variety of devices and form factors, as well as tools to help users understand and control how they are spending time on their device. Our investments in our computing platforms, as well as in AI and design are also helping us generate great momentum in our made-by-Google hardware business across Pixel, Home, Nest, Chromecast, and more. We brought Google Home and Mini to Ireland, Australia, Spain, and Mexico. Additionally, bringing the Nest and Google teams together is showing early results. The products can more seamlessly work together and our product development and go-to-market are benefiting from the new alignment. There is a lot more to come here in the next few months. Second, our video platform, YouTube, is growing tremendously. We launched our revamped YouTube Music service across 17 countries, and it’s receiving great feedback from users and artists. This quarter, YouTube rebranded its subscription service, YouTube Premium, featuring originals like our hit series Cobra Kai, which got 41 million views for the first episode alone. While advertising on YouTube is an incredibly strong and growing source of income for creators, we are also investing in new ways for creators to generate revenue on the platform, including paid channel memberships, merchandise shelves on YouTube channels, and endorsement opportunities, through a company we acquired in 2016, FameBit. In fact, half of the creators that used FameBit in the first three months of 2018 doubled their YouTube revenue. And third, our advertising platforms are firing on all cylinders, as we put the power of machine learning into marketers’ hands. At Google Marketing Live, we introduced our newly rebranded advertising products, our core product Google Ads, Google Marketing Platform which provides analytics and ad serving for large marketers and agencies, and Google Ad Manager, our monetization engine for publishers. We also announced a new ad format powered by machine learning, called Responsive Search Ads. It automates the manual process of building text ads and optimizes them in real-time to show the best performing ad for each search query. Advertisers also got a first look at local campaigns and smart campaigns. Local campaigns are designed exclusively to drive foot traffic to local businesses, and smart campaigns are now the default for new SMB advertisers. Small business owners love the simplicity and the results. This quarter, we announced shopping and commerce partnerships with leading global retailers like Carrefour, designed to give people the power to shop wherever and however they want. Carrefour is a great example of how we can partner deeply with companies, bringing our shopping and ads and cloud products together for them. They recently chose to migrate from Office to G Suite for their more than 160,000 employees and have selected us as their main cloud provider, based on our ability to support the company’s digital transformation. Speaking of our efforts to help businesses succeed in the cloud, our cloud business has great momentum. It’s a natural extension of our longtime strength in computing, data centers, and machine learning. We have developed these over many years and they power our own services in the cloud and are now helping others. This week’s Google Cloud Next event will have more than 20,000 SMBs, up from over 2,000 at our Cloud Conference in 2016 with over 250 customers speaking. I won’t spoil any of the surprises, but I do want to call out Google Cloud’s momentum. Success of our vertical strategy and customer-centric approach was illustrated by key wins including Domino’s Pizza, SoundCloud, and PricewaterhouseCoopers. Target is migrating three areas of its business to the Google Cloud platform. Financial institutions are increasingly turning to the cloud to modernize their systems, explore new business models and improve customer experiences. New customers include Banco Itaú in Brazil. We also have our rapidly growing business for our specialized cloud AI services. AirAsia expanded its relationship with us to use machine learning and data analytics. We are seeing an acceleration in business adoption of Chromebooks, the most secure and cost-efficient way for businesses to enable their employees to work in the cloud. In Q2, unit sales of managed Chromebooks grew by more than 175% year-over-year. And we saw deployments at customers like Veolia. And to support our growing global customer base, we continue to invest in new cables, open new regions in Finland and Los Angeles, and announced the Zurich region. We now have 17 open regions with three more on the way. Before I close, I want to give a quick shout out to the work that we are doing to build great specialized products for the next wave of people coming online for the first time in countries like India, Indonesia, Brazil, and Nigeria, many of whom experience the web only through their mobile phone. This is a big area of focus for us. Through a great partnership with Indian Railways and RailTel, we have hit our goal of enabling high-speed public Wi-Fi in 400 train stations across India. We’ve also rolled out this Google Station model in Indonesia and Mexico with more to come soon. And to help spur AI innovation in Africa, we recently announced the new Google AI research center in Ghana with the goal of bringing together top machine learning researchers and engineers to explore AI research and applications in Africa and beyond. Of course, our commitment to help communities and people benefit from the digital economy extends beyond the products that they use. Last month, as part of our broader growth Google effort, we expanded the Google IT Support Professional Certificate program to more than 25 community colleges in the U.S. This will give students an opportunity to learn skills needed to jump start their careers in IT support. I want to thank Googlers for their hard work which helps us create products that billions of people love and use every day. With that, I’ll hand it back over to Ruth.

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

Thank you very much. Two questions if I can. Sundar, for you, following upon your comments, we’ve seen all of these partnerships announced in the commerce space. I want to understand how those partnerships might evolve over the next couple of years? What Google brings to the table for those partners, what it might do for the advertising services business as we think long-term? And then, we’ve been getting a lot of questions on Waymo, in the quarter. Is there any insight you can give us on some of the key investment milestones or how we should be thinking about capital allocated to the Waymo business in the coming years? Thanks so much.

Great. On the commerce front, obviously, it’s a natural sector for us to drive partnerships. We already have deep advertising relationships with many of these providers, increasingly. Shopping is an area where we are beginning to work together. And finally, I think cloud is another important way by which we can start working together. So, I do think we are seeing a lot of traction there. I gave the Carrefour example. We also announced a strategic partnership and significant investment in JD.com, the second-largest e-commerce company in China. Today, we are already, for example, in Google Express partnering with over 100 merchants including national retailers like Walmart, Costco, Target, Walgreens, and PetSmart. So, there is a lot of traction. I think we are building upon these relationships, trying to have more holistic conversations across the breadth of our offerings, and I think I see all being very synergistic.

And then, in terms of Waymo, we remain very excited about the opportunity with Waymo. You’ve seen us talk about our progress on a number of fronts. I think the main point is, it is still very early. But, in terms of our progress. So, 2018, the focus has been to launch the commercial rider program in Phoenix that we’ve talked about, looking to do that by year-end. We do view that as a first step in building a more fully rolled-out rider program in the future. And as we’ve discussed on prior calls, we continue to trial the program in Phoenix with an emphasis on delivering a safe experience that delights users. We’ve also continued to build out our vehicle relationships. You saw announcements regarding FCA and Jaguar. We’re expanding our testing to more states. We’re also working on additional areas such as logistics and deliveries. We talked this past quarter about licensing the technology for personal use vehicles, and we’re also focused on working with cities to help strengthen public transportation. More specifically, you’re focused on CapEx. As I said, we’re excited about the long-term opportunity but the creation of a new market does take time. As on the CapEx versus OpEx, the way it works is once the commercial program is up and running beyond what is viewed as more of a development or R&D phase, then much of the investments or CapEx versus OpEx. And that’s for car sensors and any other spend. So, yes, we’re excited. We do think it’s really an important market, but it is still very early.

I have two questions. First, could you provide an update on the rollout of GDPR and how it has unfolded compared to your expectations? Second, Sundar, with Google Next coming up, you've expressed positive views about the business. Can you share any additional statistics regarding the growth rates in G Suite, GCP, or their combined performance? Lastly, as we look at the scaling of this business over time, do you think the pace of gross margin progression will differ significantly from that of Azure or AWS at similar revenue levels? Thank you.

Thanks, Heather. On GDPR, obviously something we’ve been working on for a long time for over 18 months, but the rollout just happened towards the end of the second quarter. So, it’s a bit early for us to say anything. But for us, it’s been super important to get it right, and we’ve always been focused on user privacy. But it’s been a big change for a lot of our partners as well. And so, we are working closely with our partners and regulators and committed to doing it right, but it’s too early to tell. The Google Next and Cloud conference is tomorrow, so I will wait for the announcements there. G Suite has gained significant momentum, clearly meeting the needs of large enterprises, as illustrated by Carrefour. We are increasingly witnessing major companies migrating, which is a positive trend. Regarding Cloud, we are making long-term investments and seeing traction. Our efforts in product development and technology are distinguishing us in the market. We are focusing on enhancing our go-to-market strategies, developing our in-house capabilities, and forming partnerships, which are starting to yield positive results. You can expect more details at tomorrow’s conference.

Thanks for taking my question there. I have two. The first one, the Google Assistant and the Hardware and Google Mini. I was curious, if you could just talk about sort of early learnings and differences in consumer behaviors, how they interact with those devices as opposed to mobile search and the phones? And they’re always very focused on the long-term value proposition for users and advertisers. Maybe talk about the focus, and the hardware is long-term for users and advertisers. And Sundar, I appreciate your color on India and Indonesia and emerging markets. Talk about how you’re strategically trying to position yourself for business potentially beyond advertising and payments or other areas in the countries, if you could, please?

So on Google Assistant, obviously, we see Google Assistant as an important evolution. And obviously, it’s early days, but it’s already exciting to see. People definitely are pushing the boundaries of what they can do with these devices, and home control and automation is a good example of the kind of use case that’s very, very different consumer behavior and which is why our assets in Nest end up battling over time. So, there is a lot more actions, people are trying to get things done, which is definitely areas we are focused on. But I think it’s important to understand that experience not just in the context of Home and Home Mini, but also in your core mobile experience, how it evolves on the phone and across the streams, you’ll have in your life. So, we’re taking the end-to-end user experience in mind, and that’s where all the investments we have done over many, many years I think will come into play as the product evolves. On your question about emerging markets, the user growth there is extraordinary to see. And we’re seeing it across all our products. So, all our major products, products which have over a billion users each, they are all doing well in these markets. And so, that’s where most of the growth is going from. And so, it’s an important area of focus. And we do see unique opportunities in these markets, which are different from the markets we are here in our more mature markets. You highlighted payments as a good example. And you’ve seen us address that exclusively with Google Tez in India. And so, we will look to do more like that. And beyond just getting our products working better, we’re going to opportunistically, we are investing in talent in these countries. And there is a lot of innovation, which is going to happen from these countries, both for their own markets and for the world beyond. And we want to be in a position to do that well.

Two, if I could. First, for Ruth. You talked about the higher cost, as you shift to a machine learning-driven business and then also your tech upgrade cycle around machine? Can you give us a sense of where you are in making those transitions and absorbing those investments from a cost perspective? And then, Sundar, mobile strength, clearly in the quarter. Can you just help us understand better how machine learning and AI are driving the stronger growth in mobile search and if there are any specific innovations or products you can point to that are driving that outsized growth? Thanks.

So, in terms of your first question and kind of machine learning, and I think you’re kind of getting at cycle. You’re really seeing it in two places, and part of that is they called out is with respect to OpEx. We’re hiring and what you’re seeing is the investments we’re making across the board, it’s ads, it’s cloud, it’s hardware, it’s the Assistant, but this is also very much in machine learning and we are really proud of the team that we have and given the opportunity set that they are able to address. And I think you were getting more broadly at CapEx. The way we’re focused on CapEx, as I said last quarter as well, we view this as it lands into our outlook for growth and the required additional compute capacity. And there are a number of growth drivers there. Part is really to support growth that we are seeing in our search and ads business that’s really consistent with the momentum that we’ve commented on today and the exciting opportunities that we see to further enhance the user and advertiser experience. It’s also for our newer businesses, as I noted in opening comments. And then very importantly, it reflects the importance of machine learning across our products including search and ads. We’ve talked about this in the past, machine learning is more compute-intensive, but it also opens up more services and products across Alphabet, and that’s what we are investing in to make sure that we’ve got the capacity with best-in-class compute capacity. And so, the build is really machines, data centers and network infrastructure, and just to make sure and put a fine point on it, while we’re ensuring that we’re well positioned to support the growth we see. We do constantly remain focused on efficiency per unit of compute. We’ve talked about that on many prior calls and are investing here for long-term value creation thoughtfully in order to be able to pursue the opportunities that we see ahead of us.

Doug, regarding your question about the impact of machine learning on the mobile search experience, it's important to note that it's enhancing our capabilities at a foundational level. We have integrated machine learning throughout various aspects, such as ranking, understanding intent, and contextualizing queries to deliver accurate answers. The improvements are ongoing, and we are continuously advancing our capabilities. For instance, the Translate example I mentioned earlier showcases how machine learning enhances our offerings. It allows us to be the go-to source when users encounter challenges. The data indicating increased usage during the World Cup in Russia supports this, showing that when faced with new experiences and questions, users turn to Google. We believe our ability to serve users effectively will continue to grow through the application of machine learning, and that's the extent of our focus in this area.

Thank you very much. First for Sundar. You talked about Android in your prepared remarks. In your blog post you said that you are concerned that the Android ruling from the EC sends a troubling signal in favor of proprietary systems over open platform. So, I wonder how you’re thinking about the possible business impact from this Android ruling, specifically on tying the Play Store from Search and the Chrome browser. And does it in any way change your strategic approach for Android going forward? And then, for Ruth, on the theme of OpEx investment trends, if we isolate just the other revenue businesses, Cloud, Play and Hardware, all growth drivers, but clearly structurally different in terms of the competitive landscape and profitability. You said, most of the headcount additions are in Cloud, but would love to understand more about how you prioritize investment across Cloud, Play, and Hardware, those three? Thank you.

On Android, I said in my blog post, Android has really worked well, I think globally for users for everyone in the ecosystem. You can clearly see there is robust competition. There is a lot of innovation, lower prices that has made Android possible at every price point. And so, I think overall, it’s created more choice for everyone, not less. We are analyzing the decision, and I think it’s too early to comment or speculate beyond what you’ve already said. But we will always take a constructive approach. We’ll appeal the Commission’s decision and take the due process available to us. But, we are also looking forward to finding a solution above all that preserves the enormous benefits of Android to users and so on. So, there is small work to be done, and I think it will become clearer as we go along. But I’m confident that we can find a way to make sure Android is available at scale to users, everyone.

And in terms of your question on investment priorities, I think one of the most important points to underscore is that one of the biggest opportunities for investment continues to be in our ads business where we are continuing to invest meaningfully, given the opportunity set that we see there. Sundar commented on some of them, as did I, looking at opportunities to enhance the user experience, to continue to improve tools for advertisers, and both of which extend the growth there. And that’s for mobile and what we are increasingly seeing, is as we focus on mobile, the benefits are across platform and help explain the growth we’re seeing in desktop and YouTube. So, we are continuing to invest here. I don’t want to leave with an answer, with the notion that the investment is just pointed to the new business sets. And then, more specifically to your question, what we look at is the opportunity set, each one of these is different. When we start with cloud, as Sundar commented, given the core capabilities that we are building upon, our technical infrastructure, security app, machine learning, analytical tools, our view is that we’re addressing a rapidly growing market with the core pillars that are needed to win. And what has been the recurring theme that we’ve talked about on these calls is the need to further build out our go to market capabilities and ensure that we’ve got the functional requirements that enterprise customers deserve. So, it’s really looking at the scale of the opportunity, the pace of investment that can be done effectively and therefore position us well. Our hardware business continues to deliver significant growth, particularly with the sales as a home family of products, and you’ve seen us invest there. We talked about the HTC acquisition last quarter because this is a scale business. And the ability to operate as effectively as possible underscores the types of investments we’re making. Play continues to benefit from broad-based app strength, it’s been a long-standing strength of ours, and we’re continuing to invest as needed there.

Great, thanks. Two questions. It seems like your commentary on cloud is very positive. It seems like that’s also what we’re hearing from Microsoft. And my guess is from Amazon what they are seeing. Do you think we’re just at a broad industry inflection point in terms of cloud adoption, and any thoughts as to why we’re seeing it now? And then, a question on advertising, there is just a big bucket of ad spend called trade promotion spend that’s largely been offline I think, and it’s almost as big maybe on a global basis as kind of traditional TV brand advertising. Any thoughts on that as an opportunity, whether there’s an ability for that to really migrate heavily online and Google’s ability to tap into those dollars? Thank you very much.

Regarding the question about cloud, I believe there is a significant turning point happening. This indicates that the situation is not a zero-sum game. All major companies are experiencing growth in this area. The key reason is that when companies implement and establish a certain architecture, they tend to stick with it for a long time, even though making a change can be difficult. However, the advantages of transitioning to the cloud are very evident. Over time, being on the wrong architecture can be costly, especially if a company needs to undergo digital transformation. Therefore, considering cloud architecture is crucial for enhancing their business. This topic is clearly on the minds of many CEOs I interact with. It's not just a concern for them; almost all businesses I talk to reflect that this is a priority for their leadership. Additionally, I foresee that businesses will increasingly adopt multiple cloud solutions. So, not only are we in the early stages of this shift, but it will also lead to significant transformations and opportunities. Our focus is on leveraging our experience built over 20 years in this domain, and we are dedicated to this journey for the long term.

And then, in terms of trends in advertising, to your question. We have talked about this quite a bit in the past, over 90% of commerce is still offline, and we do see a great opportunity for digital to play a bigger role in that and tap into our budgets, into other budgets that have traditionally been there. And so, we are quite focused on the advertising opportunities, as said. And the fact that ad budgets are offline, and as we focus on, these are opportunities and the tools for advertisers, we see that as another opportunity.

Hey. Good afternoon, everyone. Thanks for taking my question. Sundar, you mentioned in your prepared remarks or highlighted at least the launch of local campaigns at Marketing Live a couple of weeks ago. I recognize that’s an initiative that will help drive demand across a number of Google properties. I’m curious in particular about Maps, and with it being a product aimed at driving store visits, one would assume Maps would play an interesting part in that. And in the past, when we’ve asked you about Maps, it was focused more on getting the user experience right. So, my question is, do you see local campaigns as something that drives a bit of incremental level of monetization of Maps.

It's a great question. Local is an exceptional use case for mobile. Local mobile searches are increasing more rapidly than our overall mobile searches, with a nearly 50% growth in the past year. We're continuing to invest in enhancing the local experience for merchants, users, and advertisers. We recently introduced local campaigns, which are designed to drive foot traffic to local businesses. Businesses just need to provide us with their budget, locations, and creatives, and we will utilize machine learning to automatically optimize the ads across our platforms. Additionally, we're experimenting with new ad formats in Maps, including promoted places and place page ads, which we have been beta testing. These are significant methods through which we are tapping into the commercial potential of Maps. I believe Maps is a tremendous asset, and we have concentrated on the user experience, which will continue since we see substantial growth potential. As we refine this experience, we are also developing strategies for monetization. These are all steps in that direction, but we will proceed cautiously and adapt as we go.

Ruth, the U.S. and Asia business has accelerated sequentially modestly, but Europe was down a touch. And I think there have been many questions around did GDPR have any impact, and Sundar said it was too early to call. But, is that just completely unrelated to what happened or maybe there is something else that’s going on that resulted in the small downtick?

We are pleased with the strong performance across all regions, with a 19% year-on-year growth in EMEA and a positive outlook for the business overall. As Sundar mentioned, it’s still early to assess the impact of GDPR. The geographic breakdown should help clarify the dynamics in each region. Specifically for APAC, we are very happy with the 34% growth on a fixed FX basis, which supports Sundar’s remarks about our excellent products and the fast-growing markets, alongside our strong leadership team. Mobile performance has been a key driver here, and we are encouraged by the growth across various countries. Overall, we are satisfied that all regions are contributing positively.

And a quick follow-up for Sundar. You mentioned on the cloud business that you’re getting strong traction among some of the big fundamental institutions. One of the big questions we get is around the heavily regulated industries like healthcare and financial. It feels like you’re starting to get better referenceability there. Are you happy with where you sit across the more heavily regulated industries now versus the tech-focused industries where you sit right now?

Definitely, and I think that’s where a lot of our investments have gone in, right, getting certifications needed, depending on the industry and building the features that you need. And that’s clearly starting to have an impact, and both on GCP, but as well as G Suite. And so, we definitely are going to continue to build out our capabilities. And we’ll be going after the opportunities in these areas very seriously.

I have a couple, maybe first going back to the commerce theme. I wanted to ask about Shopping Actions and the level of adoption you might be seeing with that format. And more generally, what do you envision monetization for Google Assistant, if we should still expect to see more of a transactional event for that platform? And then on TAC, I wonder if it’s worth adding more color perhaps in the timing or how much of the second quarter benefited from the moderation in growth in sites TAC just so we can get a better sense as to how to model that expense item over the next few quarters?

Colin, on Google Assistant and Shopping Actions, I do think it’s been exciting to see the improvement there, but I still would like that experience to evolve a lot more before we play around with monetization. And in all of these areas, we always set a high bar to make sure the user experience is working well. You have seen us do that with Maps or something like that. And I think today while we have taken promising steps with Shopping Actions for all of us to really work well and to delight users. I still feel we have some work ahead of us and that’s what we are focused on. So, we will stay focused there, get the experience and then that will give us new avenues to monetize it. I've seen this with YouTube now, beyond ads we are experimenting with a lot of new formats, and the same thing here. So, I am pretty confident of our ability to do that well if we get the user experience right.

And then in terms of TAC, as we’ve talked about in the past TAC as a percentage of revenues is affected by quite a number of factors. The main point is that we do continue to expect the TAC rate to increase on a year-on-year basis. And the primary reason is when we talked about really in the past that it’s the underlying shift to mobile which carries higher TACs than desktop. So, on a year-on-year basis, that’s the trend that you are really seeing as the ongoing strength in mobile. Over the past four quarters, changes in partnership agreements have also been a driver of increases in the TAC rate and then there are a host of other factors that we’ve talked about they can have an impact in any quarter like device mix or partner mix or mix of organic and pay distribution points. And so, as we called out last quarter, we did expect the pace of year-on-year growth in the sites TAC rate to slow beginning in this quarter, the second quarter, and you can clearly see that in the data. And as we’ve repeatedly said, it is most effective to focus on year-on-year changes given the significance of this shift to mobile and mobile growth. And so variations in quarter-on-quarter moves are less instructive.

One for Sundar and one for Ruth. Sundar, firstly. You went through a lot of your initiatives in your opening comments, but didn’t mention Verily. So can you talk a bit about what the bottlenecks are then to be solved by you or your clients before you can scale the Verily opportunity? And then for Ruth, you’ve been clear on the CapEx ramp is due to you are investing ahead of growth. What is the usual timeframe do you think you see where those investments will pay off? And what factors would make the CapEx to sale ratio start growing even faster from here? Those were my questions.

Broadly, Verily is clearly set up as an other bet, and they are doing really important work on healthcare, if we look at the recent progress on their diabetes monitoring and so on. So they’re in deep work and they have a lot more talk about. Across healthcare, we see a big opportunity for both Google and Alphabet. It’s a vertical which is very important for Cloud. And we are obviously helping a lot of healthcare partners across their needs. And Verily is definitely doing a very specialized solution in this area. And we’ll have a lot more to say on all of this over the course of time.

And then, with respect to CapEx, look, I think our view is that what you are saying here is an aggressive piece of investment, given our outlook for growth. And as I said the required additional compute capacity, we are quite focused on the kind of full resource utilization across businesses. If I go back to a couple of years when we incorporated stock-based compensation into the way we are talking about the businesses, I made the point that that is helpful, both externally and internally, and looking at resource utilization, the same is clearly true of CapEx. And we are quite focused on long-term value creation, focused on ensuring that we’re pursuing attractive opportunities in a prudent, appropriate way to capture the opportunity while making sure that we’re looking at the full again resource requirement. So, at this point, that’s an interesting way of framing the question, how does it grow even faster from here. We’re quite focused on this piece, an aggressive piece and an appropriate one, given the opportunities that we see, and it is a class data centers, machines and network infrastructure as I said.

Thank you. I just want to get into website growth. First, maybe you can help us a little bit understand the strength in mobile search. Are there any new ad formats or ad changes? You mentioned local, anything to call out there? And then, just wondering, given the YouTube controversies last year, did YouTube accelerate this quarter? And what are some of the big content areas that you are investing in? Thank you.

So, in terms of sites revenue, I think our view is ongoing strength reflects our focus on improving the user experience and enhancing tools for advertisers. And both Sundar and I have spoken about them. We’ve got an intense focus on innovation that we’ve discussed previously that’s enabled us to deliver over 100 innovations each quarter. And really exciting area is the benefit of machine learning. It’s a valuable driver of our growth, not only enhancing experiences for users but the tools that we talked about for advertisers and for app developers, certainly helping them find the right audience, to be able to optimize campaigns at scale, to deliver more relevant and higher-quality ads. Sundar talked about a number of them. The Google Marketing Live we’ve really highlighted what we’re seeing there and the benefits, whether we’re talking about responsive search ads or local campaigns, smart shopping campaigns, another great example is universal app campaigns. So, across the board. And again, I made this comment previously about the benefit we’re seeing on mobile is extending to the growth opportunities across platforms.

Yes. And I’d add that a good way to think about it is, today, there is a lot of complexity you need to deal with to have advertisers, and increasingly we are using machine learning to do all the hard work and get them to focus on the business problem they are trying to solve. And that turns out to be a big driver overall. On YouTube, we definitely are continuing to see great product momentum, it’s the user adoption and interest and our metrics are very strong, continues to grow and the growth is global. And we see it across many, many verticals. And overall, we’ve invested a lot in making sure we are delivering the content responsibly. And it’s been a big area of focus across Google. We are investing a lot in people to review the content that’s going, improving the policies. And again, using machine learning to make all of this work better. And I think people are noticing it including our advertisers and they’re engaging with the platform more. So, I would say overall, there is a lot of momentum there. And I’m excited about it.

Great. Thanks everyone for joining us today. We look forward to speaking with you again on our third quarter call.