Alphabet Inc - Class A (GOOGL) — Q1 2023 Earnings Call Transcript

Thank you. Good afternoon, everyone, and welcome to Alphabet's First Quarter 2023 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler, and Ruth Porat. Now I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise. And now I'll turn the call over to Sundar.

Thank you, Jim, and good afternoon, everyone. I'm pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation. On Cloud, we continue to be on a long and exciting journey to build that business. Cloud delivered profitability this quarter, and we remain focused on long-term value creation here. Today, I'll give an update on the 2 themes I spoke about last quarter: one, our advancements in AI and how they are driving opportunities in Search and beyond; and two, our efforts to sharpen our focus as a company. Then I'll talk about our momentum in Cloud and close with our progress at YouTube. First, the incredible AI opportunity for consumers, our partners, and for our business. I've compared it to the successful transition we made from desktop to mobile computing over a decade ago. Our investments and breakthroughs in AI over the last decade have positioned us well. In our last call, I outlined 3 areas of opportunity: continuing to develop state-of-the-art large language models and make significant improvements across our products to be more helpful to our users; empowering developers, creators, and partners with our tools; and enabling organizations of all sizes to utilize and benefit from our AI advances. We have made good progress across all 3 areas. In March, we introduced our experimental conversational AI service called Bard. We have since added our PaLM model to make it even more powerful. And Bard can now help people with programming and software development tasks, including code generation. Lots more to come. For developers, we have released our PaLM API alongside our new MakerSuite tool. It provides a simple way to access our large language models and begin building new generative AI applications quickly. A number of organizations are using our generative AI large language models across Google Cloud Platform, Google Workspace, and our cybersecurity offerings. For years, we've been focused on making Search even more helpful. From Google Lens to multi-search, to visual exploration in Search, immersive view in Maps, Google Translate, to all the language models powering Search today; we have used AI to open up access to knowledge in powerful ways. We'll continue to incorporate generative AI advances to make Search better in a thoughtful and deliberate way. We'll be guided by data and years of experience about what people want and our high standards for quality. And we'll test and iterate as we go because we know that billions of people trust Google to provide the right information. As it evolves, we'll unlock entirely new experiences in Search and beyond just as camera, voice, and translation technologies have all opened entirely new categories of queries and exploration. AI has also been foundational to our ads business for over a decade. Products like Performance Max use the full power of Google's AI to help advertisers find untapped and incremental conversion opportunities. Philipp will talk more about this in a moment. And as we continue to bring AI to our products, our AI principles and the highest standards of information integrity remain at the core of all our work. As one example, our Perspective API helps to identify and reduce the amount of toxic text that language models train on, with significant benefits for information quality. This is designed to help ensure the safety of generative AI applications before they are released to the public. We are proud to have world-class research teams who have been advancing the breakthroughs underpinning this new era of AI. Last week, I announced that we are bringing together the Brain Team in Google Research and DeepMind into one unit. Combining all this talent into one focused team, backed by the pooled computational resources of Google, will help accelerate our progress and develop the most capable AI systems safely and responsibly. On to my second theme, the company's sharpened focus. I spoke last quarter about our commitment to invest responsibly and with discipline and to find areas where we can operate more cost-effectively and with greater velocity. We have significant multiyear efforts underway to create savings, such as improving machine utilization and finding more scalable and efficient ways to train and serve machine learning models. We are making our data centers more efficient, redistributing workloads, and equipment where servers aren't being fully used. This is important work as we continue to significantly invest in infrastructure to drive our many AI opportunities. Improving external procurement is another area where data suggests significant savings, and this work is underway. And we are taking concrete steps to manage our real estate portfolio to ensure it meets our current and future needs. We'll continue to use data to determine additional areas for durable savings. Next, Google Cloud. I'm pleased with the ongoing momentum in Cloud. Our disciplined expansion of our product road map and go-to-market organization has helped to build one of the largest enterprise software companies in the world. We have consistently grown top line revenues and improved annual operating margins, and we continue to do so this quarter. Our growth has come from our deep relationships with large enterprises, a strong partner ecosystem, and our product leadership. Over the past 3 years, GCP's annual deal volume has grown nearly 500%, with large deals over $250 million growing more than 300%. Nearly 60% of the world's 1,000 largest companies are Google Cloud customers, and many leading start-ups and millions of small and medium enterprises use Google Cloud. We have also built a strong partner ecosystem. Over the last 4 years, the number of Google Cloud Partner certified practitioners around the world has increased more than 15x. The largest global system integrators have built 13 dedicated practices with Google Cloud compared to 0 when we started. And today, more than 100,000 companies are part of our Google Cloud Partner Advantage program. Our growth is also driven by our product leadership. We are bringing our generative AI advances to our cloud customers across our cloud portfolio. Our PaLM generative AI models and Vertex AI platform are helping Behavox to identify insider threats, Oxbotica to test its autonomous vehicles, and Lightricks to quickly develop text-to-image features. In Workspace, our new generative AI features are making content creation and collaboration even easier for customers like Standard Industries and Lyft. This builds on our popular AI Bard Workspace tools, Smart Canvas, and Translation Hub used by more than 9 million paying customers. Our product leadership also extends to data analytics, which provides customers the ability to consolidate their data and understand it better using AI. New advances in our data cloud enable Ulta Beauty to scale new digital and omnichannel experiences while focusing on customer loyalty; Shopify to bring better search results and personalization using AI; and Mercedes-Benz to bring new products to market more quickly. We have introduced generative AI to identify and prioritize cyber threats, automate security workflows and response, and help scale cybersecurity teams. Our cloud cybersecurity products helped protect over 30,000 companies, including innovative brands like Broadcom and Europe's Telepass. We are successfully integrating Mandiant with our products, including Mandiant Threat Intelligence and Breach Analytics. Our open approach to AI development, coupled with our industry-leading TPUs and best-in-class GPUs from NVIDIA, enables innovative companies to tackle any AI workload with speed and flexibility. AI21 Labs, Replit, Midjourney, and many others build and train foundation models and generative AI platforms. We are the only cloud provider to announce availability of NVIDIA's new L4 Tensor Core GPU with the launch of our G2 VMs, which are purpose-built for large inference AI workloads, such as generative AI. Turning next to YouTube. Let me start by thanking Susan Wojcicki for her terrific leadership of YouTube for 9 years. She recently transitioned into an advisory role with Alphabet this quarter, with Neal Mohan, a long-time leader at Google and YouTube, becoming the new head of YouTube. Here are a few highlights from the quarter. YouTube Shorts continues to see strong momentum with Creators. Last year, the number of channels that uploaded to Shorts daily grew over 80%. Those posting weekly on Shorts saw the majority of new channel subscribers coming from their Shorts post. The living room remained our fastest-growing screen in 2022 in terms of watch time, and we are seeing growth and momentum internationally. On our subscription business, we rolled out several new updates to YouTube Premium. Premium subscribers can now queue videos on phones and tablets, stream continuously while switching between devices, and auto-download recommended videos for offline viewing. And we have great momentum around YouTube TV and YouTube Primetime channels. We announced pricing for the NFL Sunday Ticket offering, which will help to drive subscriptions, bring new viewers to YouTube's paid and ad-supported experiences, and create new opportunities for Creators. To close across the company, we are excited about helping people, businesses, and society reach their full potential with AI. We'll share updates at Google I/O about how we are using AI across our products, including our Pixel devices and share some exciting new developments for Android. Thanks to our employees around the world who continue to work hard to advance our mission. After nearly 25 years, the work to organize the world's information and make it accessible and useful is as urgent as ever, and I look forward to the work ahead.

Thanks, Sundar, and hey, everyone. It's great to be here today. I'll kick off with Google Services' performance in the first quarter, then provide color into our key opportunity areas and then turn it over to Ruth for more on our financial performance. Google Services revenue of $62 billion was up 1% year-on-year, including the effect of a modest foreign exchange headwind. In Google Advertising, Search and Other, revenues grew 2% year-over-year, reflecting an increase in the travel and retail verticals, offset partially by a decline in finance as well as in media and entertainment. In YouTube Ads, we saw signs of stabilization and performance, while in network, there was an incremental pullback in advertiser spend. Google Other revenues were up 9% year-over-year led by strong growth in YouTube subscriptions revenues. Now let's double-click into the 3 areas I laid out last quarter where we see clear opportunities for long-term growth in advertising: number one, Google AI; number two, retail, which cuts across all of our ads products and services; and number three, YouTube. First, Google AI. I've said before, AI has long been an important driver of our business. Advancements are powering our ability to help businesses, big and small, respond in real-time to rapidly changing market and consumer shifts and deliver measurable ROI when it's needed most. In Q1, we continued to innovate across our products. Take Core Search, for example. In targeting, we updated search keyword relevance using the latest natural language AI from MUM models to improve the relevance and performance of shown ads when there are multiple overlapping keywords eligible for an auction. In bidding, we improved our Smart Bidding models to bid more accurately based on differences in search ad formats. In other words, we bid more effectively depending on how a user wants to engage with an ad. In Creatives, we opened our Automatically Created Assets beta to all advertisers in English. ACA generates text assets alongside your responsive search ads and uses AI to help reduce the amount of manual work to keep creatives fresh and relevant to users' query, context, and to the advertisers' business. To then unlock Core Search further and maximize conversions across all of Google, we're actively helping more advertisers pair together with Performance Max. Advertisers who use PMax are, on average, achieving over 18% more conversions at a similar CPA. This is up 5 points in just 14 months, thanks to advances in the AI underlying bidding, creatives, search query matching and new formats like YouTube Shorts. I mentioned earlier that travel was a contributor to growth. In March, we launched PMax for travel goals. Now even the smallest hoteliers can benefit from the expanded reach of hotel ads in PMax, like family-run Corissia Hotels Group, who drove a 32% increase in revenue and a 26% increase in total direct bookings within just 1 month of using PMax for travel goals. There’s more to come here as we add even more AI product features. Stay tuned for more at Google Marketing Live in May. Moving on to retail where we had a solid quarter. Our focus is on 3 pillars: number one, making Google a core part of shopping journeys for consumers and a valuable place for merchants to connect with users; number two, empowering more merchants to participate in our free listings and ads experiences; and number three, driving retail performance further with great ads products. In a macro environment of doing more with less, our tools and solutions are proving that we can deliver value for retailers online and omnichannel and drive high-value customers even in challenging times. Caraway, a direct-to-consumer maker of cookware, used Target ROAS to uncap budgets and PMax to optimize and deploy spend across Google inventory for its Q4 Black Friday campaign. PMax drove a 46% increase in revenue and a 31% jump in ROAS, leading to Caraway's best business day in history and robust reinvestment in its AI-first strategy for Q1. For omni-focused retailers, we recently rolled out store sales reporting and bidding in Performance Max for store goals. This is helping retailers go beyond just optimizing online conversions to also optimize to their stores, reaching and bidding for high-value customers more likely to spend in stores. Danish department store, Magasin, recently used our store sales solution to boost its omnichannel ROAS 128% versus online-only campaigns. Thanks to dynamic in-store values from its first-party data, including its high-value customers, Magasin can now measure the full impact of its online investments on e-commerce and physical store revenue.

Thank you, Philipp. Our financial results for the first quarter reflect continued healthy fundamental growth in Search and momentum in Cloud. As I go through the discussion today, I will reference some changes to our reporting and disclosures that are covered more fully in the 8-K we filed last week. I will conclude with our outlook. For the first quarter, our consolidated revenues were $69.8 billion, up 3% or up 6% in constant currency. Search remained the largest contributor to revenue growth on a constant currency basis. In terms of expenses and profitability, year-on-year comparisons are impacted by 3 factors: first, the $2.6 billion in charges we took in the first quarter related to workforce and office space reductions. We provided a table in our earnings release that shows the impact of those charges on the cost of revenues and operating expenses. Second, the adjustment we made to the estimated useful lives of servers and certain network equipment at the beginning of 2023. As you can see in our earnings release, the effect for the first quarter was a reduction in depreciation expense of $988 million. Third, the shift in timing of our annual employee stock-based compensation awards from January to March delays the step-up in SBC from Q1 to Q2. This shift in timing does not affect the total amount of SBC over the full year 2023. Total cost of revenues was $30.6 billion, up 3%, driven by other cost of revenues of $18.9 billion, which was up 7%, the biggest factor of which was compensation costs associated with data centers and other operations followed by content acquisition costs. Operating expenses were $21.8 billion, up 19%, with a significant impact from the charges related to workforce and office space reductions. Operating income was $17.4 billion, down 13%, and our operating margin was 25%. Net income was $15.1 billion. We delivered free cash flow of $17.2 billion in the first quarter and $62 billion for the trailing 12 months. We ended the quarter with $115 billion in cash and marketable securities. Turning to our segment results. These were affected by 2 additional changes outlined in our 8-K filing. First, reflecting the increasing collaboration between DeepMind and Google Services, Google Cloud, and Other Bets, as of Q1, DeepMind is reported as part of Alphabet's unallocated corporate costs. And second, beginning in the first quarter, we updated our cost allocation methodologies to provide our business leaders with increased transparency for decision-making. In our filing, we provided a recast of prior period results for the segment for these 2 changes. The highlights of the year-on-year performance of our segments that I will review reflect these recast results. Starting with Google Services, revenues were $62 billion, up 1%. Google Search and other advertising revenues of $40.4 billion in the quarter were up 2%. YouTube advertising revenues of $6.7 billion were down 3%. Network advertising revenues of $7.5 billion were down 8%. Other revenues were $7.4 billion, up 9%, reflecting primarily ongoing significant subscriber growth in YouTube TV and YouTube Music Premium. TAC was $11.7 billion, down 2%, primarily reflecting a mix shift between Search and Network. Google Services operating income was $21.7 billion, down 1%, and the operating margin was 35%. Turning to the Google Cloud segment, revenues were $7.5 billion for the quarter, up 28%. Growth in GCP remained strong across geographies, industries, and products. Google Workspace's strong results were driven by increases in both seats and average revenue per seat. Google Cloud had operating income of $191 million, and the operating margin was 2.6%. As to our Other Bets, for the first quarter, revenues were $288 million, and the operating loss was $1.2 billion. Turning to our outlook for the business. In terms of the operating environment, our results in the first quarter reflected ongoing headwinds due to a challenging economic environment, and the outlook remains uncertain. Foreign exchange headwinds have moderated, and we expect less of a foreign exchange headwind in the second quarter based on current spot rates. With respect to Google Services, within advertising, Q1 results reflect the resilience of Search with its unique ability to surface demand and deliver measurable ROI. Excluding the impact of foreign exchange, the revenue growth of Search was similar to last quarter. In YouTube, we saw signs of stabilization in ad spend on a sequential basis. We continue to prioritize growth in Shorts engagement where we are encouraged by progress in monetization. As to other revenues, in YouTube subscriptions, we are pleased with the significant ongoing subscriber growth in both YouTube Music Premium and YouTube TV. In Play, revenues were down year-on-year, primarily due to the continued impact of foreign exchange in APAC, although results have improved as we lapped the impact from our introduction of fee reductions last year. Turning to Google Cloud. Our investments in product innovation, our go-to-market organization and our partner ecosystem delivered strong results as customers across industries and geographies increasingly rely on Google Cloud to digitally transform their businesses. That being said, in Q1, we continued to see slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop which remains uncertain. In terms of operating performance, we remain focused on driving long-term profitable growth in Cloud while continuing to invest given the substantial opportunity. Moving to Other Bets. In the first quarter, we similarly worked to refine strategies and prioritize efforts across the portfolio, including reductions to headcount. I will now walk you through an update on our efforts to reengineer our cost base, slowing the pace of operating expense growth while creating capacity for key investment areas, particularly in support of AI across the company.

I have 2. First one for Sundar. Sundar, I guess as you think over the course of the next 12 months, I know you have a lot of new AI tools to show us, what new behavior changes or capabilities are you most excited about for users, developers, and advertisers as these tools come out? And then the second one for Ruth. Could you talk to us about how much of the AI tools have you incorporated internally to sort of drive more productivity out of your engineers, your sales force, your G&A? Or is that sort of something to come over the next couple of years?

Thanks, Brian. This is an exciting time for us. We see significant opportunities at Google to enhance our offerings. In Search, we've been utilizing AI for some time now, which has greatly improved the quality of our search results over the years through the use of large language models. We now have the opportunity to implement these models more seamlessly. As mentioned earlier, we are committed to doing this thoughtfully, with our primary focus on benefiting users. We will continue to iterate and innovate as we always have. One of the areas I'm particularly enthusiastic about is that we've learned from experience that users return to Search. They engage with content they’ve already explored, and we have the chance to utilize LLMs to improve those interactions. This presents a significant opportunity. For YouTube, we aim to enhance the experience for both creators and viewers regarding how videos are consumed, so you can expect to see changes there. In Workspace, we've already begun implementing changes, and I believe this area will see the most advancement since productivity is a key area where generative AI can make an impact. Moreover, in Cloud, this is a pivotal moment for us; nearly all organizations are considering how to leverage AI for transformation. We are engaging with both start-ups and larger companies on this front. I see this as a significant turning point as well. Ruth?

And then in terms of the second part of your question, AI has been so much a part of what we've been doing for quite some time that there are a number of different ways to answer it. One is, as I noted, we have a number of efficiency efforts underway, and one of them is about using AI and automation to further improve productivity across Alphabet. That being said, we already have AI in a lot of what we do, for example, in the way we operate and run the finance organization. It's helpful in a lot of the analytics that we use. And one of the exciting things for us is the opportunity then to share that with Cloud customers. And Sundar just noted what we're doing within Google Workspace. We obviously all live on Google Workspace. And so that's another example of how we benefit internally from the productivity from AI, but it's also something that's available for users and enterprise customers more broadly. And then finally, one of the areas that we've talked about is the opportunity with our compute capacity and all that we've done there and the infrastructure innovation which, again, is helpful internally for what we do but on behalf of our customers.

One for Sundar and then one for Ruth. Sundar, just as you think about integrating Bard into your Search products over time, can you just talk more about what percentage of Search queries you think would utilize large language model-type responses? And how should we think about the cost of running Search on these models relative to today? And then, Ruth, I was just hoping you could follow up on your comment on CapEx, maybe if you could help us understand the modest step-up in CapEx relative to 3 months ago.

Thank you, Doug. We have introduced Bard as a complementary product to Search. However, we plan to integrate LLM experiences more directly into Search as well. Initially, we will roll this out gradually to test, refine, and innovate. Overall, I believe it can address a wide range of queries, and I am enthusiastic about its potential to assist users, particularly in areas where answers may be less straightforward and require creativity. These present opportunities for us. Additionally, in our current query categories, we will also explore how AI can enhance user guidance. It's still early in the process, but there's significant innovation on the horizon. Regarding costs, we have always considered the cost of compute, and we have amassed considerable experience over the years in this area. Our habitual focus is on driving efficiencies in hardware, software, and models throughout our operations. This is not a new challenge for us. In fact, we embrace advancements in technology, as we have developed leading capabilities to lower costs progressively and implement them at scale globally. We will take all of this into account as we pursue innovation, and I am confident in our approach.

And in terms of CapEx, we do now expect that total CapEx for the year, for 2023, will be modestly higher than in 2022. And I tried to point out that we're expecting a step-up in the second quarter, and that will continue to increase throughout the year. And as we discussed last quarter, AI is a key component. It underlies everything that we do. And we're continuing to invest in support of AI, support of our users, advertisers, and our Cloud customers as we're commenting on here. And then as we talked about last quarter, the increase in CapEx for the full year 2023 reflects the sizable increase in technical infrastructure investment and, on the flip side, a decline in office facilities relative to last year.

Maybe 2, if I could, first on cloud. Obviously, one of the dominant themes, and you touched upon it, is this client optimization theme that's going on broadly in cloud computing. Can you give us a little bit more of your perspective on where we are in terms of the optimization theme broadly in cloud computing as a headwind to either revenue growth or backlog growth compared to the tailwinds of broader long-term consumption growth and, possibly, the contribution of AI initiatives to cloud computing growth? And then second on YouTube, obviously, you've seen a lot of success with respect to engagement and consumption on Shorts. Can you give us an update on where we are on monetization in Shorts compared to the consumption you've already seen in usage shifts?

So in terms of the cloud question, the point we're trying to underscore is there's uncertainty in the economic environment. And so we saw some headwind from slower growth of consumption, with customers really looking to optimize their cost given that macro climate. I'll leave the forecasting to you on that. But as both Sundar and I commented on, really pleased with the momentum that the team has been delivering and the breadth of what they've been working on.

I do think, I would add, that we are leaning into optimization. I mean that's an important moment to help our customers, and we take a long-term view. And so it's definitely an area we are leaning in and trying to help customers make progress in their efficiencies where we can.

Yes, on the Shorts side, look, Shorts viewership is growing rapidly. We announced 50 billion plus daily views on the Q4 earnings call, up from 30 billion last spring. We're pleased with our continuing progress in monetization. As I said earlier, people are engaging and converting on ads across Shorts at increasing rates. Closing the gap between Shorts and long form is a top priority for us as is continuing to build a greater creator and user experience. Ads on Shorts are now available via video action app, Discovery, and Performance Max campaigns and via product feeds. Shorts also are shoppable. Again, we're the only destination where Creators can produce all forms of content across multiple formats and screens with multiple ways to make a living. And as Sundar said, last year, the number of channels that uploaded to Shorts daily grew over 80%. And then in February, we brought revenue sharing to Shorts via our YouTube Partner program. Our sustainable revenue sharing model at scale remains pretty unique in the industry, and we continue to see strong creator adoption. So ultimately, our goal is to make YouTube the best place for Shorts viewers and Creators. And that's really what we're focused on right now.

I'll just ask a tough question. Sundar, you came up in a group that structured a lot of the Android partnerships from inception and I believe possibly the iOS agreement as well. So how do you feel about Alphabet's ability to maintain the unit economics with these partnerships in light of Microsoft's ambitions to increase its share of paid search? And Ruth, does this have any impact on your outlook for profitability of overall Alphabet over the long term?

I believe these dynamics have always existed, and it's crucial to keep that in mind. Throughout my experience, we've consistently operated in a competitive landscape for these deals. While I can't discuss the details of our partnerships, we've successfully focused on creating the best possible product that adds value for users. When collaborating with our partners, we strive to establish a mutually beneficial experience. Ultimately, partners select us because it's what their users desire, which has significantly contributed to the widespread distribution of Search. Our commitment to continuous innovation and enhancement of Search is foundational. We've approached this robustly for many years, and I'm confident that we will maintain this ability.

And then in terms of just longer-term profitability, I think I'll broaden out your question somewhat because the way we're looking at it is we continue to be committed to investing for growth, and we want to ensure we have overall capacity for growth. And so we have a number of work streams underway to, as we keep describing it, durably reengineer our cost base. And in particular, what we're excited about are long-term opportunities with AI, and we want to make sure we have the capacity to continue to invest there in the other areas where we see long-term growth in Search and Ads, Cloud, YouTube, hardware. And so that underscores our efforts to build in additional flexibility. And as we have said repeatedly, we want to ensure that expense growth is not growing out of revenue growth, and that means driving revenue growth and really being as disciplined as we can on these various work streams that we've discussed earlier in this call and last quarter as well to improve our expense growth trajectory.

Maybe one for Sundar and one for Ruth. Sundar, you got the cost question on learning language models into Search. Can you talk about revenues? I think, on one hand, you'll see better relevancy and maybe better results with higher conversion. But on the other hand, there might be fewer areas for ads or fewer queries because people get answers more quickly. Are you optimistic on that transition? Maybe give us your thoughts there. And then, Ruth, backing out the onetime charges, it looks like OpEx growth is now 8%, so real progress there. Could you give us a flavor of where you are, you think, in your optimization cycle?

So first of all, throughout the years, as we have gone through many, many shifts in Search, and as we've evolved Search, I think we've always had a strong grounded approach in terms of how we evolve ads as well. And we do that in a way that makes sense and provide value to users. The fundamental drivers here are people are looking for relevant information. And in commercial categories, they find ads to be highly relevant and valuable. And so that's what drives this virtuous cycle. And I don't think the underpinnings over the fact that users want relevant commercial information; they want choice in what they look at. Even in areas where we are summarizing and answering, et cetera, users want choice. We care about sending traffic. Advertisers want to reach users. And so all those dynamics, I think, which have long served us well, remain. And as I said, we'll be iterating and testing as we go. And I feel comfortable we'll be able to drive innovation here like we've always done.

And in terms of our OpEx trajectory, yes, there was the elevated expense and OpEx from the $2.6 billion in severance and office space charges. There was also a $988 million benefit from lower depreciation due to the change in useful lives, but that obviously is an ongoing benefit. And there was also, as we noted in our earnings release, a benefit from the shift in timing of stock-based compensation from the first quarter to the second quarter, so a little bit of complexity there. But at the core of your question, we remain extremely focused on these various work streams that we've talked about. It starts with the pace of hiring. It goes to the various work streams that both Sundar and I referenced around using AI and automation to improve productivity, all that we're doing with suppliers and vendors to be as efficient as possible, all that we're doing around optimizing how and where we work. You've seen some of those announcements this quarter beyond the workforce reduction, things that we're doing in, for example, office services, and we're executing against each of these various work streams. So our view is that there's more to do. And as we try to be clear, we're in execution mode. You'll see some of the benefit in '23, you'll see more of it in '24, and we're going to continue building against it beyond.

I have a question for Philipp and one for Ruth. Philipp, we are looking into Search advertising and want to understand the shifts in demand between sellers of goods and sellers of services. Can you provide insights on the service sector? Has demand returned to pre-pandemic levels? And regarding goods and e-commerce, have you noticed a decline in demand? Anything you can share to help us compare this to pre-pandemic levels in terms of services versus goods demand? Ruth, regarding efficiency and diligence, how does the significantly higher cost of capital influence how you manage and assess the Other Bets assets? Can you share any thoughts on how you might be reevaluating some of the Other Bets or changing the structure of these assets?

Yes. On the first part, again, it didn't come across quite clearly, but I hope I understood correctly. In Search, revenues grew modestly year-over-year, again, reflecting an increase in the retail and travel verticals, offset partially by a decline in finance and media and entertainment. So excluding the impact of FX performance, it was actually similar to last quarter. The ongoing performance of Search, notwithstanding the headwinds, reflects really Search's resilience with the, I'd say, ability of Search to surface demand and deliver a measurable ROI in an uncertain environment. I called out the key verticals in the quarter. There's really no additional color on other verticals. I'd say, maybe more broadly, what we saw reflects what's being reported elsewhere. And across the headlines, many companies are very focused on shorter-term profitability amidst this uncertainty and some pulled back ads budgets as well.

It was a bit hard to hear you. You were breaking up. So I think I'm going to start and address what I heard as to the second question, as we're looking at higher cost of capital in this environment, how does that affect the way we're looking at Other Bets. Hopefully, we heard you correctly. It was crackling. Look, I think as we've talked about repeatedly, as it relates to Other Bets, our focus is to use deep technology to drive innovation, and we're very focused on the pace of investment and financial returns. That has been a consistent focus to generate attractive returns. And I think the core operating models and the long-term operating models are going to be the most relevant as we're looking at the returns we can generate. Yes, absolutely mindful of the higher cost of capital, but I think, at its core, we're looking at what's the value creation and the return on those. And as we indicated when we went through the reduction in force, we similarly worked across the Other Bets. And some of them, as they're on a path to ongoing growth, we were moderating what is the expense trajectory there as we're looking at what's the overall return on invested capital. And we're continuing to work on these to make sure that we're delivering value. And your point is an important one; that's part of a broader question about the underlying operating assumptions.

Two for me as well. I guess, first, Sundar, the consolidation of the AI teams, I think you talked about that helping to accelerate innovation. So I'm curious, specifically with that consolidation, what are the product milestones that we should look out for related to that? And then Philipp, regarding your comments on retail, specifically on shopping and payments, how should we think about that evolving across the platform this year? Maybe similarly, what are some milestones we should look out for on that front?

Thanks. I'm really excited about combining the exceptional teams from Brain and DeepMind. Their achievements in AI over the past ten years have paved the way for this moment. This collaboration will allow us to better pool our talent and computational resources, which is essential for our development. Our primary focus is to create more advanced models in a safe and responsible manner, addressing the needs of our customers on both the consumer and cloud sides, while fostering an iterative process that promotes continuous improvement. As you've seen, we have already released PaLM APIs and are integrating PaLM across our products, and we will keep making progress and update you as we go.

So retail is an important vertical and driver for us, and I called out the year-over-year increase in retail and Search and other. I also talked earlier about the macro climate and how we've established we can really drive value for retailers, even in challenging times, whether it's online or offline, both. We're helping them drive their business goals, meet customers wherever they choose to shop. Maybe a little more, some key trends here, retailers are increasingly focused on maintaining margins and driving ROI right now. PMax, Broad Match are key levers providing more incremental conversions, while insights on bids and budgets are really helping retailers identify opportunities for growth and efficiencies across our suite of products. I've talked at length on prior calls about omnichannel. Our local and omnichannel solutions are helping bridge the gap here between online and offline by using AI to reach nearby shoppers, promote local inventory fulfillment options, optimize in-store visits and sales, for example. And then to help really retain loyal customers and acquiring new ones, we have YouTube app deep linking, and new customer acquisition goals in PMax are helping here, making checkouts easy with tools like virtual cards. And Chrome is obviously important. So those are just some of the key points. Overall, we're giving retailers really the best, I hope, AI-powered tools and solutions to maximize reach and ROI and really create a seamless experience, including, where possible, on the payment side for their customers, and this will continue to be our focus here.

Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2023 call. Thank you, and have a good evening.