Alphabet Inc - Class A (GOOGL) — Q1 2019 Earnings Call Transcript

Thank you. Good afternoon, everyone. And welcome to Alphabet’s first quarter 2019 earnings conference call. With us today are Ruth Porat and Sundar Pichai. Now, I will quickly cover the Safe Harbor. Some of the statements that we make today regarding our business performance and operations, and our expected level of capital expenditures may be considered forward-looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today’s earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. And now, I will turn the call over to Ruth.

Thank you, Ellen. In the first quarter, total revenues of $36.3 billion were up 17% year-on-year and up 19% in constant currency, following a strong 2018. Once again our results were driven by ongoing strength in mobile search, along with important contributions from YouTube, followed by Cloud. For today’s call, I will begin with a review of results for the quarter on a consolidated basis for Alphabet focusing on year-over-year changes. I will then review results for Google, followed by Other Bets and we will conclude with our outlook. Sundar will then discuss business and product highlights, after which we will take your questions. Let me start with a summary of Alphabet’s consolidated financial performance for the quarter. Our total revenues of $36.3 billion reflect a negative currency impact year-over-year of $1.2 billion or $1 billion after the impact of our hedging program. With respect to Alphabet revenues by geography, U.S. revenues were $16.5 billion, up 17% year-over-year. EMEA revenues were $11.8 billion, up 13% year-over-year and up 16% in constant currency, reflecting weakening of the euro and the British pound. APAC revenues were $6.1 billion, up 27% versus last year and up 31% in constant currency, reflecting primarily the weakness of the Australian dollar and the Indian rupee. Other Americas revenues were $1.9 billion, up 10% year-over-year and up 21% in constant currency, reflecting primarily the weakening of the Brazilian real and Argentine peso. Turning to profitability, in our earnings press release, we provide a table to highlight the impact of the year European Commission fine on operating income, net income and EPS results in the first quarter. I will comment on results both with and without the impact of the fine as I review the results. On a consolidated basis, total cost of revenues including TAC, which I will discuss in the Google segment results, were $16 billion, up 19% year-on-year. Other cost of revenues on a consolidated basis was $9.2 billion, up 27% year-over-year, primarily driven by Google related expenses. The biggest contributor was costs associated with our data centers and other operations including depreciation, followed by content acquisition costs primarily for YouTube and mostly for our advertising supported content, but also for our newer subscription businesses YouTube Premium and YouTube TV, which have higher TAC as a percentage of revenues. Operating expenses including the impact of the EC fine were $13.7 billion. Excluding the impact of the fine, operating expenses were $12 billion, up 20% year-over-year. The biggest increase was in R&D expenses with headcount growth in Cloud as the largest driver. Growth in sales and marketing expenses primarily reflects additions to headcount. Growth in G&A expenses is primarily due to legal matters, including the effect of a legal settlement gain recorded in the first quarter of 2018. Stock-based compensation totaled $2.8 billion. Headcount at the end of the quarter was 103,459 up 4,688 from last quarter. Consistent with prior quarters, the majority of new hires were engineers and product managers. In terms of product areas, the most sizable headcount increases were in Cloud for both technical and sales roles. Operating income was $6.6 billion. Excluding the impact of the EC fine operating income was $8.3 billion, up 9% versus last year for an operating margin of 23%. Other income and expense was $1.5 billion. As I trust most of you are aware, in 2018 this line item was meaningfully elevated because of the introduction of a new accounting standard that requires recognition of unrealized gains and losses on equity securities. We provide more detail on the line items within OI&E in our earnings press release. Our effective tax rate was 18.3% for the first quarter reflecting a sizable impact from the non-deductibility of the EC fine. Net income was $6.7 billion and earnings per diluted share were $9.50. Excluding the impact of the EC fine, net income was $8.3 billion and earnings per diluted share were $11.90. Turning now to CapEx and operating cash flow. Cash CapEx for the quarter was $4.6 billion, which I will discuss in the Google segment results. Operating cash flow was $12 billion, with free cash flow of $7.4 billion. We ended the quarter with cash and marketable securities of approximately $113 billion. Let me now turn to our segment financial results, starting with the Google segment. Revenues were $36.2 billion, up 17% year-over-year. In terms of the revenue detail, Google Sites revenues were $25.7 billion in the quarter, up 17% year-over-year. In terms of dollar growth results were led again by mobile search, with a strong contribution from YouTube, followed by desktop search. Network revenues were $5 billion up 8% year-on-year, continuing to reflect the performance of the primary drivers of growth AdMob followed by Google Ad Manager. Other revenues for Google were $5.4 billion, up 25% year-over-year fueled by Cloud and Play and partially offset by hardware. Google Cloud Platform remains one of the fastest growing businesses in Alphabet with strong customer momentum reflected in particular in demand for our compute and data analytics products. Strong growth in Play was driven particularly by performance in APAC. Hardware results reflect lower year-on-year sales of Pixel, reflecting in part heavy promotional activity industry-wide, given some of the recent pressures in the premium smartphone market. We 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 $6.9 billion or 22% of total Advertising revenues and up 9% year-over-year. Total TAC as a percentage of total Advertising revenues was down year-over-year, reflecting a favorable revenue mix shift from Network to Sites, as well as a decrease in the Network TAC rate. The Sites TAC rate was flat year-over-year, as the impact of the ongoing shift to mobile, which carries higher TAC was offset by the growth in TAC free Sites revenue primarily from YouTube. In Q1, the Network TAC rate declined year-on-year primarily due to a favorable product mix shift. Google stock-based compensation totaled $2.6 billion for the quarter, up 13% year-over-year, operating income was $9.3 billion, up 11% versus last year and the operating margin was 25.8%. Accrued CapEx for the quarter was $4.5 billion, reflecting investments in data centers, servers and office facilities. Let me now turn to and talk about Other Bets. Revenues were $170 million primarily generated by Fiber and Verily. Operating loss was $868 million. Other Bets accrued CapEx was $59 million. Key recent accomplishments include, Waymo recently announced that it will expand its activities in Michigan, opening a facility in Detroit that will be the first factory dedicated to the production of L4 autonomous vehicles. Last week, there were exciting announcements from two traditional Other Bets that were originally incubated within X. Loon announced a long-term strategic relationship to advance the use of high altitude vehicles to deliver connectivity, with SoftBank’s telecoms group HAPSMobile, which will invest $125 million in Loon. Wing became the first drone delivery company to receive air carrier certification from the FAA, an important step toward beginning a commercial service delivering goods from local businesses to homes in the U.S. Let me close with some observations on our priorities and longer term outlook. As we highlighted on our last call, there was a significant swing year-over-year in the impact of currency movements on our results this quarter, from a big tailwind in the first quarter of 2018 to a headwind in 2019. These affect both revenues and operating income given the majority of our expenses are in the U.S. Based on the continued strengthening of the U.S. dollar relative to key currencies, we expect to continue to see headwinds to our revenues and operating income again in the second quarter. In terms of our key revenue drivers, with respect to Sites revenues, as we indicated last quarter, the timing of product changes in ads at times can have an impact on year-on-year growth rates. We will continue to make changes with a focus on the long-term best interest of users and advertisers. We remain confident about the sizable opportunity ahead to improve the advertiser and user experience through our ongoing commitment to product innovation, in particular by leveraging machine learning across our ads products and properties. Turning to the key drivers of growth and other revenues. We are pleased with the momentum of Google Cloud platform, with balanced growth of both new customers and expansion within existing customers driving revenue growth. With respect to hardware results, while the first quarter results reflect pressures in the premium smartphone industry, we are pleased with the ongoing momentum for Assistant-enabled Home devices, particularly the Home hub and Mini devices and look forward to our May 7th management at I/O from the hardware team. Turning to profitability, with regard to Google OpEx, the first quarter results once again reflect our ongoing commitment to investing for the long-term. You can see that in R&D where we continue to invest in technical talent for priority areas like Cloud, search and machine learning. In terms of sales and marketing, the pace of investment in Q1 reflected a timing shift in spend and we expect these expenses to pick up in the second quarter. In Other Bets OpEx, we are still early in the life of these companies and do plan to continue to invest meaningfully for the long-term opportunity. With respect to CapEx, the year-on-year decline reflects the purchase of a building in New York in the first quarter of 2018. As discussed on our call last quarter, while we anticipate that our full year CapEx investments will exceed those in 2018, the growth in investments should be at a meaningfully lower rate than in 2018. We continue to expect a sizable investment in both compute requirements to support long-term growth, as well as in office facilities. In conclusion, we feel confident about the opportunities ahead and we continue to invest thoughtfully for the long-term. I will now turn the call over to Sundar.

Thanks, Ruth. It’s great to be here with you all. Q1 was a very busy quarter at Google and it’s only going to get busier. Later this week, we will host YouTube’s upfronts events BrandCast followed by our Annual Developer Conference Google I/O next week and our advertising summit Google Marketing Live later in the month. You will hear a lot more from each of these teams throughout May, so I hope you can join us. We will always be a company that’s focused on the long-term willing to make investments that will help our businesses and our customer’s businesses succeed as technology continues to evolve. You saw this in the transition to mobile computing years ago and we are seeing that today in the shift to AI. We feel very positive about the enormous opportunities ahead involving search and assistant, capturing new ad budgets, cloud computing, AI and other areas. What gives us these opportunities as Google’s position to help people, businesses and society in countless ways through our products. Today, I will start by talking about our core mission of making information universally accessible and useful, then I will provide an update on our computing video and advertising platforms, and finally, I will discuss our hardware and cloud efforts. First, an update in our mission to make information accessible and useful is helping people every day. A big focus for us is building products that are designed to help people in their day-to-day lives. Our Duplex technology within Google Assistant can now help you easily book a table at your favorite restaurant on all Android and iOS devices in 44 U.S. states. Just tell the Assistant where you want to go and when and it will do the rest. We have also begun testing AI walking navigation in Google Maps, which uses augmented reality and gives the phone’s camera to show you where you are relative to the surroundings as you are walking. Just last week, we announced an improved job search experience in the U.S., that helps people easily discover quality remote jobs, allowing them to work right from home. As part of our Google news initiative, we kicked off the local experiments project, working with local publishers to uncover new approaches to their business models and operations, so they can continue bringing great local content to the readers. AI is now spurring a new era of computing, which is more predictive and more assistive. We are committed to doing deep research and working to advance the space in a responsible way. AI is deeply embedded in our products, from Search to Photos to Google Home and we are also expanding others’ ability to build on our advancements. Recently at TensorFlow’s Annual Developer Summit, we announced TensorFlow 2.0, making it easier than ever to build machine learning models through improvements like TensorFlow Privacy, which helps train models with differential privacy, meaning that users’ data is better protected. Now on to our computing, video and advertising platforms. There’s tremendous momentum across the Android ecosystem and our other computing platforms as we head into Google I/O. In the first quarter we released the beta of Android Q, which brings added privacy protections, new tools for developers to engage users and more. Android Go Edition, an optimized version of Android tailored for smartphones with one gigabyte or less delivers a powerful fast and secure experience, specifically optimized for entry-level smartphones. Today roughly 70% of entry-level Android devices are now activating with Go like Samsung’s J2 Core. We are seeing great momentum in Android Auto as well. At the Chicago Auto Show, Toyota announced that it will include Android Auto in upcoming vehicles starting in 2020. That means all of the top 10 carmakers now support Android Auto, and in Google Play, first-time buyers grew by nearly 50% year-over-year. I am very pleased with how these platforms are growing and creating amazing experiences for users, developers and partners. Our newest platform Stadia, which revolutionizes the way gamers access and play their favorite games and brings together the best of Google’s infrastructure and open ecosystem approach. With Stadia, you will be able to play advanced AAA games on any type of screen instantly without ever needing to download the game or install updates. The reception from gamers in the industry has been incredible and we look forward to sharing more when it launches later this year. Next our video platform, YouTube. YouTube’s top priority is responsibility. As one example, earlier this year YouTube announced changes that reduce recommendations of content that comes close to violating our guidelines or that misinforms in harmful ways. There are a lot more improvements, which we will be rolling out in the next few weeks and our work is ongoing. We have also expanded the content offering, availability and the functionality on some of our newer YouTube experiences. YouTube TV is now available nationwide with many new networks and channels added in Q1. YouTube Music and YouTube Premium are now available in 43 countries up from five markets at the start of 2018. In mid-March, we launched YouTube Music in India, one of YouTube’s fastest growing markets. Since launch, the YouTube Music app has been downloaded more than 15 million times in the country. YouTube’s Ad business, for both brand and direct response campaigns, continues to grow and support our creators. In Q1, we again saw how YouTube is the go-to destination for watching Super Bowl ads before, during and after the big game. This year viewership of Super Bowl ads on YouTube during the game grew by nearly 60%. More broadly, across our Ads business, our advertising product team led by Prabhakar continues to build new products for marketers, with more than 100 enhancements introduced every quarter. We do rigorous testing on each of these improvements to ensure that we are creating the best experience for users and advertisers. Our focus has always been on investing for the long-term rather than managing for results quarter-to-quarter. I feel really positive about the opportunities ahead and the innovations that we are bringing to marketers, many of which are powered by machine learning. Philip on our business teams has done a great job helping advertisers take full advantage of these new capabilities. For instance, more than 70% of our advertisers are already using automated bid strategies in Google Ads and these machine learning powered technologies help customers get better results for their investments. In Q1, we began testing new shoppable ad units and Google Images so brands can highlight multiple products available for sale in sponsored image results. You have also seen us make it easy for people to buy products and take action when shopping on Google Assistant and search with a universal cart on mobile, desktop and Google Home devices. Since we launched these capabilities a year ago, the number of participating merchants has increased sevenfold. Lastly, at the Game Developers Conference, we introduced a host of advertising solutions for developers, like app campaigns for engagement, which help developers reengage players with relevant ads across Google’s properties. Next, I will give an update on our hardware and Cloud efforts. First hardware, I am very proud that in only a few short years, we have built a strong foundation in hardware. For example, demand for our Google Home family of products remains strong, especially the Home Mini and Home Hub. The breadth and depth of our product lines across Pixel, Nest and Home is amazing and you will see us continue to develop this incredible lineup. The team has also done a lot of work to scale our operations and we will continue to optimize our distribution, branding and points of business. We also announced the new campus and engineering hub in Taiwan, largely to support our hardware efforts. Not only are features like Night Sight in Pixel winning industry awards, but Net Promoter Scores tell us that many people who use our hardware products truly love them, which is particularly important as we move into this new era of computing. We are still early in our hardware journey and when I look ahead at the portfolio that we have created across Pixel, Home and Nest, I feel really good about the range of products that we have. And finally, our growing Cloud business. Thomas has really hit the ground running. Just a few weeks ago, I was on stage with him at our Cloud Next event, where we hosted a sold-out crowd of more than 30,000 attendees. As I said at Next, moving to the Cloud should be simple and seamless. I was excited to announce Anthos, which gives customers a very elegant solution to both hybrid cloud and multi-cloud in a single technology stack. The early feedback from analysts, customers and partners has been really great. We also announced innovations across many of our other products that enabled developers to build and deploy AI, help enterprises to better secure their data, allow Android users to leverage their phones as a security key and much more. We are also deeply committed to becoming the most customer-centric Cloud provider for enterprise customers and making it easier for companies to do business with us. Thanks to new contracting, pricing and more. Today nine of the world’s 10 largest media companies, seven of the 10 largest retailers and more than half of the 10 largest companies in manufacturing, financial services, communications and software use Google Cloud. Some of the companies that we announced at Next included the American Cancer Society and Mekason in healthcare. Media and entertainment companies like USA Today and Viacom, consumer packaged goods brands like Unilever, manufacturing and industrial companies like Samsung and UPS, and public sector organizations like Australia Post. Finally to support our customers’ growth, we also announced the addition of two new cloud regions in Seoul and Salt Lake City, which we plan to open in 2020. These new cloud regions will build on our current footprint of 19 cloud regions and 58 data centers around the world. As we celebrate 20 years and over 100,000 employees strong, I am incredibly proud of the work that our teams at Google do every day. We have so many bright opportunities ahead and seizing those opportunities starts with our investment in the communities where we operate around the world and right here at home. In the U.S., not only are we expanding our workforce across the country, but we are helping people in every state gain the digital skills they need to succeed in today’s economy. In fact, just one year after kicking off our collaboration with Goodwill, 250,000 Americans have learned new digital skills and 27,000 have found a job. We also feel a deep responsibility to make sure that as we grow our business, we are doing it with minimal impact on the environment. Today, a Google data center uses 50% less energy than a typical data center while delivering seven times more computing power than we did five years ago. Since 2017, we have matched 100% of the electricity consumption of our operations with purchases of renewable energy and I am proud that Google is the world’s largest corporate buyer of renewable energy. I have never been more excited about Google and where we are headed. I want to thank every Googler around the world for joining us on that journey. With that, I will hand it back over to Ruth.

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

Thanks for taking the question. Maybe a couple of parts on the revenue performance in the quarter. Ruth, you called out potential volatility on the Q4 earnings call. I wanted to understand a little bit about what you are calling out in Q4 and how that might have manifested itself in Q1 on the product side of the equation, so we could just better understand how much of it was isolated to Q1 or might be a headwind as we move through the year? And as you look at the individual performance of the ad divisions in sites, desktop, mobile search, YouTube, it seems like you were still calling out strength in mobile search and YouTube. So could it be desktop search where we actually saw some weakness in the quarter? Thanks so much for any granularity and color on that.

Sure. Thanks, Eric. So I will try to step back and start at the highest level. Obviously, on a reported GAAP basis, revenue growth in Q1 reflects the FX headwind that we talked about in contrast to the tailwind last year and as you know well, we don’t report sites revenues on a fixed FX basis, but the delta between fixed and floating growth rates at the Alphabet level is a good proxy for the effect on sites revenue. Beyond that, I tried to draw that the year-on-year growth rate in part reflects our strong 2018. And then more to your question as we indicated last quarter, another item is the timing of product changes in Ads can impact year-on-year growth rates and we make changes with a focus on the best interest of users and advertisers over the long-term we do not manage by quarter, so we are introducing enhancements only after product testing, and that was sort of the overarching color that I was trying to give you. In terms of desktop, it was a modest contributor to revenue growth. It does remain an important form factor for certain more complex tasks such as planning vacations or assessing insurance options. And as we have talked about in prior calls, we continue to see the ongoing importance of desktop for many users and many tasks, notwithstanding the growing utility of mobile. So I led with the items that are really driving the growth, but that was a bit more color on desktop for you.

Thank you.

Yeah. Thanks. Sorry about that. So two questions, just following up on Eric’s on the revenue growth. Ruth can you just give us a little bit more detail on the paid click growth, the deceleration that we saw at 39% from the 50%s and 60%s last year. That’s just a comp issue or something more specific? And then, just on the spending side, I want to understand a little more just how you are thinking about spending relative to three months ago. I know you talked about both CapEx moderating and also headcount moderating three months ago. Just curious, at least that headcount is still in that camp figure thinking just given that it seems like there’s a pretty big ramp expected under the new Cloud CEO? Thanks.

Okay. So, starting with clicks and CPCs. As we have discussed on prior calls, the biggest driver affecting those CPCs and click trends is YouTube engagement ads with YouTube Clicks representing the vast majority of total clicks. And so while YouTube Clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube Click growth decelerated versus what was a strong Q1 last year reflecting changes that we made in early 2018, which we believe are overall additive to the user and advertiser experience. And then in terms of your two spending investment questions, in terms of headcount, first, we do continue to expect the growth rate to moderate slightly in 2019 from the year-on-year growth in 2018. And as I indicated in opening comments, we are continuing to invest in technical talent for priority areas like cloud, search, and ML. And so cloud has been and continues to be the primary area of headcount growth and as Thomas indicated as well, I think Sundar did as well. In terms of CapEx, just to fill up the last part I think of your question. Relative to my comments last quarter that we expect the full year 2019 growth rates for CapEx to moderate quite significantly versus the year-on-year growth in 2018, there’s no change in our expectation for the year on that point either. The first quarter last year obviously included a sizable real estate acquisition in New York. But, overall, we continue to invest meaningfully in our technical infrastructure given our outlook for compute requirements to support long-term growth. Technical infrastructure is the biggest driver of CapEx growth, but we do also continue to invest in office facilities. In fact, as we announced in the first quarter, we expect CapEx of over $13 billion in 2019 just in the U.S. in data center construction and offices, with major expansions in 14 states. And more generally, while we are investing aggressively to support our outlook for compute requirements, we are also very focused on improving efficiency with our technical infrastructure and you can see that through our innovations and things like custom server hardware and TPUs, which can be more cost-effective especially for machine learning workloads.

Thank you.

Thank you. Sundar, I have a question about Cloud. You are clearly discussing it more frequently. When do you anticipate being ready to disclose revenue figures or growth rates comparable to what others have been providing for some time? Additionally, what do you consider to be the main competitive advantages of GCP? Also, what significant changes has Thomas implemented for 2019 that might differ from your previous strategies? Thank you.

Thanks, Heather. Good question. Overall, I would say, I think, you saw the momentum coming out of Next. And I would say, at a high level the key differentiators which we are focused on and which we hear from customers are five key things: security and reliability, being really open about hybrid multi-cloud, customers don’t want to be locked into any one Cloud provider. We want to be a platform for open source and so we are really working well there in enabling options. AI and ML as capabilities. And finally, as customers think about digital transformations, we bring all of Google’s advances to bear to help them through the journey. I think I would say, Thomas is really building upon a strong foundation, but we are really accelerating and scaling up go-to-market both internally and through our channel partners has been a huge focus. I am incredibly excited that we just announced a couple of weeks ago that Rob Enslin has joined us to head go-to-market and just along with Thomas, both of them bring close to three decades of serving enterprise customers, and so that reflects the commitment we have. I think we are building a strong business across all our verticals, and we are definitely seeing strong momentum, and look forward to being able to share more at the appropriate time.

Thank you.

Thank you for taking my question. I have two, one for Ruth, one for Sundar. We noticed that larger than expected slowdown in the properties TAC in the quarter that includes cost of mobile search, while the other cost of revenues which includes YouTube content cost seem to maintain an expected growth rate despite what you said about more moderate turns in hardware. So just wondering if that’s a wise way to infer anything about the relative performance of mobile search revenue versus YouTube from those cost lines in the quarter? And then on Waymo, maybe for Sundar, we are hearing more and more about collaborations between ridesharing networks and AV provider, so the idea of mixed fleets or part human part AV as a means of potential deployment of AV technology. So can you just comment if that mixed fleet approach would be something that you think Waymo would consider versus its own full ride service network? Thank you.

In terms of the TAC rate for our sites, we've mentioned in earlier calls that we anticipated the year-over-year growth in the TAC rate would start to slow from the second quarter of last year, and that trend continued throughout 2018. This quarter, the TAC rate being constant compared to last year shows ongoing growth in mobile, and it is also supported by growth in YouTube, where related content and costs are included in other sales expenses, which is a key point to highlight. Additionally, we've previously noted that TAC as a percentage of revenues is influenced by various factors, including changes in product mix, device mix, and partner mix. Focusing on Waymo, we remain primarily concentrated on the ride-sharing sector and are excited about the increase in the number of Waymo riders since last quarter. However, as discussed in previous calls, we are also exploring several other avenues, including long-haul trucking, logistics, deliveries, personal vehicles, and last-mile solutions for urban environments. Specifically, in relation to your question, we are licensing our technology, and we announced in March that one of our 3D-LiDAR sensors will be available to companies outside the self-driving car industry, starting with robotics and physical security applications, such as in warehouses or agriculture. We believe this can enhance our operational leverage. While we are exploring various options, our main focus remains on developing the ride-hailing business.

Okay. Thank you.

Okay. Thanks. So, Sundar, I wanted to follow up on your Stadia commentary. How are your conversations with some of the larger PC and console publishers going right now? You obviously offered them an additional distribution outlet with billions of users, which is something that they probably didn’t have before. But what is the pushback that you might be getting from publishers if any? Thanks.

I mean, I think, there genuinely I mean, I think, we see genuine excitement, because I think, they see the opportunity for a shift, a point of inflection, but they realize the technical challenge of pulling something like this off. And so, but once they get their hands on with the technology and then they see the experience, I think, completely wins people over. And so we are having conversations across the Board and I think people are definitely engaging in a very committed way and they are investing in it and so it’s up to us to bring it all together and have a compelling service later this year and that’s what the team has been working on. But I think, not pushback per se, but they want to see our commitment, which is what we demonstrate and they are working hard to make the investments on their side. And so it’s a big joint effort and it’s working well.

Thank you.

Thank you for taking my questions. I have two. The first one is about the product changes. Ruth, can you provide more details on which products or regions are mostly affected by these changes? Also, could you explain the key user experience you are aiming to improve and what message you have for advertisers who may be increasing their spending now and how that will have a positive long-term impact? Sundar, regarding your comment about YouTube, you mentioned that there are more potential changes coming in the next few months. Can you elaborate on that? Thank you.

I will begin by addressing the YouTube comments. In terms of content responsibility, we are committed to continually enhancing our approach to managing the platform. This includes reducing inappropriate content and, more importantly, ensuring that we recommend high-quality content while minimizing harmful or low-quality recommendations. We have already implemented several changes and more are on the way, which will consistently improve the YouTube experience and remain our top priority. Regarding the question about product changes, I believe you are referring to the advertising experience. The key takeaway is that we maintain a long-term perspective on our goals and have a disciplined approach to evolving our products. While we don’t focus on quarterly performance alone, we do see consistent results. Our work may show some fluctuations from quarter to quarter, but we remain optimistic about the opportunities ahead and are concentrating on that future.

Thanks.

Good afternoon, everyone. Sundar reminded us that April and May are significant months for the company due to various large annual events, and each of those sectors has its own objectives and targets. We are also hearing more about your teams collaborating, for instance, a major cloud engagement resulting in increased ad spending from an enterprise. Can you discuss how you manage the balance between encouraging your leaders to grow their respective businesses while also motivating them to collaborate? Additionally, we would like to get your updated perspectives on data collection and usage. I’m sure you have ongoing conversations with politicians and regulators regarding this. We've seen reports about potential changes in Chrome and within the advertising platform, and we would appreciate your insights on how recent discussions are shaping both your short-term and long-term views on data collection and usage policies. Thank you.

Thank you. You're correct that these months are particularly busy, especially as we approach I/O. As a company, we take our processes very seriously and are committed to maintaining appropriate work hours, which fosters collaboration between different groups. We measure this and hold people accountable, which is crucial for our operations as we focus on our product areas. As a leadership quality, this commitment is very important to me, and the leaders here share that goal, making it a part of our culture, especially concerning privacy, which is one of our top priorities. We strive to stay ahead of user expectations around privacy, which are constantly changing, and we're working hard to ensure that privacy is effective for everyone and easy to use. This year, we will implement more changes, particularly in Chrome, which is dedicated to being a leader in privacy and security, while prioritizing user experience. Throughout all these changes, we must consider both the content and publisher ecosystems since advertising is key to their value creation. We are being thoughtful in our approach, and there's been significant interest from the Board. We engaged early with GDPR and support it by proactively preparing. It's vital that the U.S. establishes a clear federal framework for privacy regulation, and we believe this is timely. We have advocated for this and are eager to take a leadership role and engage where necessary.

Great. Thank you, Sundar.

Great. Thank you. I have a couple, first one follow-up on the revenue growth dynamics, specifically the sequential growth trend. I wonder if we should just assume now that there’s greater seasonality in core search just given the increasing mix of shopping and product ad formats. And Sundar, question in AI machine learning, since clearly this remains an area of significant strength for the company. I am wondering, what’s stage of development you would characterize these tools as being today and whether we should expect the overall case of advancement from AI to accelerate in terms of products and services? Thank you very much.

Regarding the first question about seasonality, we experience various events throughout the year without a consistent pattern. While there are certain trends that repeat annually, one-off events also occur, leading to inherent fluctuations we navigate each quarter, which is a normal aspect of our work. There is indeed seasonality in hardware businesses, and commercial behaviors also exhibit seasonal patterns. However, we frequently encounter one-off events as well, and we always manage to adapt. Concerning machine learning, I believe we are still in the early stages. I'm excited that over the last three years, our AI-first strategy has integrated machine learning in a fundamental way across our products to enhance user experience, including in advertising. We are beginning to simplify the process for businesses to identify their needs while we handle an increasing amount of work across the board, but there is still significant potential for growth in this area.

Thank you. I have a question for Ruth and one for Sundar. Ruth, regarding mobile search, could you share how it performed compared to your expectations? I understand there’s a lot of noise from YouTube in that area, but how is mobile search currently performing? What are the main drivers, such as queries, higher click-through rates, or changes in ad formats? And looking ahead to the next few years, what do you see as the key factors? Sundar, on the hardware business, there are concerns that it’s not gaining a strong trajectory, with comparisons to Microsoft a decade ago. Could you help us understand the significance of the hardware business for Google and your long-term vision for it? Thank you.

So in terms of the Mobile Search and the Site’s revenue more broadly, I think the main point, as we have both tried to indicate in opening comments, is we view the advertising opportunity as significant, given, in particular, the opportunity with machine learning, both for users and advertisers, as well as our commitments to product innovation and being the backdrop of an environment where nearly half of the budgets in the U.S. are still spent offline and about 90% of commerce in the U.S. is still offline and we are focused on digital playing a bigger role in that and tapping into other marketing budgets, by offering an attractive ROI. And then, apart from people spending more time on digital content, to your question, we know that better measurement, better ad delivery, better user experience, all help grow the pie for everyone in the ecosystem. And then more broadly, within YouTube, as we talked about last quarter, we do continue to see significant growth in direct response and we remain excited about the upside potential there. Brand advertising is still the largest part of the business. It’s growing at a stronger pace. But we would call out direct response given what we see as the upside potential.

So, Justin, regarding the hardware business, as mentioned earlier, we are still in the early stages. Our commitment is strong, and we see this as essential for advancing the future of computing and ensuring that our services reach users as intended. Overall, we view it as a significant opportunity. Even though we are relatively new to this space, we are performing well with products like Google Home and Assistant, showing strong momentum. We believe we are leaders in the market, especially on a global scale. Computing will continue to evolve beyond phones, and we are dedicated to being a part of that long-term. The phone industry is currently experiencing year-on-year challenges, but the ecosystem is continually advancing. I am excited about innovations such as 5G and the emerging foldable phones, where Android plays a crucial role. There is much more to come, and we are focused on it. Our product quality is improving, user feedback is positive, and the range of our lineup is enhancing year-on-year, which keeps me very enthusiastic.

Thank you.

Hey, everyone. I want to revisit the comment about the deceleration, but perhaps from a different perspective. Ruth, why did the growth rates decline more significantly in Europe and the U.S., excluding foreign exchange, compared to Asia, and can you provide any insights on why we’re seeing a more notable slowdown in Western markets? Looking at the bigger picture, the digital ad sector saw solid growth in the first quarter, something you mentioned back in February, so this isn't a surprise to you. How much of the slowdown you observed, excluding foreign exchange, can be attributed to advertiser demand issues in these markets versus proactive changes you've implemented on your side regarding the product? Thank you.

In terms of the regions, the year-on-year growth rates reflect the product comments I made regarding the first quarter. The U.S. and Europe showed similar year-on-year changes, while growth in Other Americas was more significant, primarily due to hardware impact. APAC remains a strong performer, delivering over 30% growth, specifically 31% on a fixed FX basis. We are well-positioned for growth across all regions. Sundar mentioned our focus on the next billion users and the exciting opportunities we see in that area.

And I don’t think there are any demand issues with the last part of your question, and as we said earlier, we work through a set of product development pipeline in a very disciplined way focused on user experience and that makes its way too and that’s how we approach it.

Thanks. Just a follow-up on the last question on EMEA and U.S. Was there any go-to-market changes in terms of the sales force or how you said quarter, anything that may have been effectively, a Q1 seasonality issue that may see some snapback in Q2?

The opening comments I said that one of the points is that we had a strong year last year and we are looking at performance in line with that. I would say more broadly overall in terms of go-to-market, our long-term investment thesis remains unchanged. We are excited about the opportunities ahead. We do continue to invest to ensure we remain well-positioned for the long-term. That applies across the businesses and so that there wasn’t a change that anything other than the comments that I had made. I think if I could just maybe expand on the investing pace, as we are looking at the pace of investing and supporting growth around the globe, what we are really looking at is what’s needed to support long-term revenue and earnings growth, the operating margin did benefit, and as I noted in my opening comments that, from the fact that Q1 marketing expense, growth moderated, but that was a timing issue. We do expect to pick up the marketing expense in the second quarter and other than that really nothing to comment on.

Thank you.

Thanks everyone for joining us today. We look forward to speaking with you again on our second quarter call. Thank you and have a good afternoon.