Alphabet Inc - Class A (GOOGL) — Q3 2023 Earnings Call Transcript

Thank you. Good afternoon, everyone, and welcome to Alphabet's third quarter 2023 earnings conference call. With us today are Sundar Pichai, Philipp Schindler, and Ruth Porat. Now, I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Form 10-K, including our Risk Factor section and our Form 10-Qs. We undertake no obligation to update any forward-looking statement. 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 hello, everyone. I'm pleased with our business results this quarter, which demonstrates strong growth in Search and YouTube and momentum in Cloud. Google turned 25 in September, which offered an opportunity to reflect on our progress over the last quarter century and to look ahead to the opportunities enabled by AI we are so excited and confident about. Our product momentum continued this quarter, as you saw with Cloud Next, Made on YouTube, and Made by Google. It's all part of our focus on making AI more helpful for everyone, and we are making good progress across the four areas that we shared last quarter. First, improving knowledge and learning. This includes our work with the Search Generative Experience, which is our experiment to bring Generative AI capabilities into Search. We have learned a lot from people trying it, and we have added new capabilities, like incorporating videos and images into responses and generating imagery. We've also made it easier to understand and debug generated code. Direct user feedback has been positive with strong growth and adoption. In August, we opened up availability to India and Japan with more countries and languages to come. As we add features and expand into new markets, we are engaging with the broader ecosystem and will continue to prioritize approaches that add value for our users, send valuable traffic to publishers, and support a healthy open Internet. With Generative AI applied to Search, we can serve a wider range of information needs and answer new types of questions, including those that benefit from multiple perspectives. We are surfacing more links with SGE and linking to a wider range of sources on the results page, creating new opportunities for content to be discovered. Of course, ads will continue to play an important role in this new Search experience. People are finding ads helpful here as they provide useful options to take action and connect with businesses. We'll experiment with new formats native to SGE that use Generative AI to create relevant high-quality ads customized to every step of the Search journey. The second area we are focused on is boosting creativity and productivity. Bard is particularly helpful here. It's a direct interface to a conversational LLM, and we think of it as an early experiment and complementary experience to Google Search. Bard can now integrate with Google apps and services, showing relevant information from Workspace, Maps, YouTube, and Google Flights and Hotels. We've also improved the Google it feature. It provides other sources to help people evaluate Bard's responses and explore information across the web. Earlier this month, we announced Assistant with Bard, a personal assistant powered by Generative AI. It combines Bard's generative and reasoning capabilities with Assistant's personalized help. You can interact with it through text, voice, or images, and in the coming months, you'll be able to opt-in on Android and iOS mobile devices. Our collaborative tools in Workspace and YouTube are also part of how we boost creativity and productivity, and they are seeing great initial traction. Third, we are enabling developers, businesses, and other organizations to build their own transformative products and services. For example, thousands of customers and partners are already using Google Cloud to capture the potential of AI and we'll share more there in a minute. And fourth, we are building and deploying AI responsibly, so that everyone can benefit. One area we are focused on is making sure people can more easily identify when they are encountering AI-generated content online. Using new technology powered by Google DeepMind SynthID, images generated by Vertex AI can be watermarked in a way that is invisible to the human eye without reducing the image quality. Underlying all this work is the foundational research done by our teams at Google DeepMind and Google Research. We are excited to roll out more of what they've been working on soon. As we expand access to our new AI services, we continue to make meaningful investments in support of our AI efforts. We remain committed to durably re-engineering our cost base in order to help create capacity for these investments in support of long-term sustainable financial value. Across Alphabet, teams are looking at ways to operate as effectively as possible, focused on their biggest priorities. Turning next to YouTube, which saw solid momentum in both its ads and subscription businesses in Q3. NFL Sunday Ticket is now live and receiving excellent reviews. Fans love our multi-view feature, which can live stream up to four games on a single screen. We’ve heard positive feedback from our partners at the NFL about the new features and live stream reliability. This is a clear example of our ability to execute big partnerships with excellence and at scale. I'm really pleased with the growth and engagement on YouTube Shorts. We continue to work on closing the monetization gap here. Shorts now average over 70 billion daily views and are watched by over 2 billion signed-in users every month. At Made on YouTube in September, we announced new tools that make it easier to create engaging content. Dreamscreen is an experimental feature that allows creators to add AI-generated video or image backgrounds to shorts. And YouTube Create is a new mobile app with a suite of production tools for editing shorts, longer videos, or both. Next, Google Cloud. We see continued growth with Q3 revenue of $8.4 billion, up 22%. Today, more than 60% of the world's 1,000 largest companies are Google Cloud customers. At Cloud Next, we showcased amazing innovations across our entire portfolio of infrastructure, data and AI, workspace collaboration, and cybersecurity solutions. We offer advanced AI-optimized infrastructure to train and serve models at scale. And today, more than half of all funded Generative AI startups are Google Cloud customers. This includes AI21 Labs, Contextual, Elemental Cognition, Rytr, and more. We continue to provide the widest choice of accelerator options. Our A3 VMs powered by NVIDIA's H100 GPU are generally available, and we are winning customers with Cloud TPU v5e, our most cost-efficient and versatile accelerator to date. On top of our infrastructure, our Vertex AI platform helps customers build, deploy, and scale AI-powered applications. We offer more than 100 models, including popular third-party and open-source models, as well as tools to quickly build, search, and conversation use cases. From Q2 to Q3, the number of active Generative AI projects on Vertex AI grew by 7x, including Highmark Health, which is creating more personalized member materials. Duet AI was created using Google's leading large foundation models and especially trained to help users become more productive on Google Cloud. We continue expanding its capabilities and integrating it across a wide range of cloud products and services. With Duet AI, we are helping leading brands like PayPal and Deutsche Bank boost developer productivity. And we are enabling retailers like Aritzia and Gymshark to gain new insights for better and faster business results. In fact, companies are increasingly using AI for the purpose of analyzing data. And customers are choosing Google Cloud because we are the only large cloud provider with a unified platform to analyze structured and unstructured data. In Workspace, thousands of companies and more than a million trusted testers have used Duet AI. They are writing and refining content in Gmail and Docs, creating original images from text within slides, organizing data in Sheets, and more. These innovations enable us to provide new services and grow our base of 10 million paying customers, including enterprises like Grupo Boticario, Unilever, and Warner Music. We also integrated Duet AI across our cybersecurity portfolio to differentiate in the marketplace, providing Generative AI-powered assistance in Mandiant Threat Intelligence, Chronicle Security Operations, and Security Command Center. This reduces the time security teams spend writing, running, and refining searches by seven times. We are the only leading security provider that combines frontline intelligence and expertise, a modern security operations platform, and a trusted cloud foundation, all infused with Generative AI, helping protect customers and partners like BT, Jack Henry & Associates, and CoverMyMeds. Turning to hardware. We unveiled our new products this month. We introduced our new Pixel 8, Pixel 8 Pro, and Pixel Watch 2 to very positive consumer feedback and reviews. Pixel is the fastest growing smartphone brand in our top markets and the only one that grew in units sold year-over-year. Our portfolio of Pixel products is brought to life, thanks to our combination of foundational technologies, AI, Android, and Google Tensor. Google Tensor G3 is the third generation of our tailor-built chip. It's designed to power transformative experiences by bringing the latest in Google AI research directly to our newest phones. New AI-powered editing features in Google Photos on Pixel 8 and Pixel 8 Pro remove distractions, generate the best shot from multiple images, and reduce distracting sounds in videos. Pixel and our third-party ecosystem are powered by Android. We just released Android 14 with more accessibility features. I also want to mention Chromebook Plus, a new category which provides the best of Chrome on great hardware with built-in Google Apps and powerful AI capabilities. We also shared that Chromebooks will now get regular automatic updates for 10 years, more than any other operating system. In Other Bets, Waymo is onboarding more riders to its commercial ride-hailing service as it gradually adds over 100,000 people from its San Francisco waitlist. Austin will follow as its next ride-hail city. Wing and Walmart announced a new partnership to provide drone delivery service in the Dallas-Fort Worth area. Before handing over to Philipp, I want to thank our employees around the world who are working to create innovative products and provide great services to people and businesses who use our products.

Thanks, Sundar, and hi, everyone. I'll start with our performance for the quarter and then give color into the three key priority areas for ads: Google AI, Retail, and YouTube that we've identified on past calls as opportunities for long-term growth in advertising. Google Services revenues of $68 billion were up 11% year-on-year. In Google Advertising, Search and Other, revenues grew 11% year-on-year, led by solid growth in the Retail vertical. In YouTube Ads, revenues were up 12% year-on-year, driven by growth in both brand and direct response. In Network, revenues declined 3% year-on-year. Google Other revenues were up 21% year-on-year, led by strong growth in YouTube subscription revenues. Let's start with Google AI. Recent dramatic advances in everything from foundational research models to LLM to Generative AI are improving our ability to deliver better performance and profitability for advertisers and more helpful, delightful experiences for users. We covered many innovations last quarter after GML, like our conversational experience in Google Ads, significant updates to Performance Max, and new campaign types like Demand Gen. As Sundar said, we're continuing to experiment with new ad formats on SGE. It's extremely important to us that in this new experience, advertisers still have the opportunity to reach potential customers along their Search journeys. I'll highlight more ways we're innovating with the best of Google AI as we double-click into our core business. In Retail, we had a great quarter. In a market where every dollar counts, our proven AI-powered solutions like Search and PMax are helping retailers drive reliable, strong ROI and meet customers wherever they are across the funnel. In Q3, we also started prepping retailers for what will be a long holiday season. Let me share some things. Number one, with a maximum number of days between Thanksgiving and Christmas and expectations for many micro peaks beyond Cyber-Five, we're arming businesses with insights and planning tools, including OptiScore and Performance Planner to uncover new opportunities, plan budgets and targets to stay competitive and be smarter with their inventory and pricing strategy. Number two. Consumer expectations are shifting, especially around price and convenience. We've seen 4x deals queries during the holidays versus other periods. 75% of users say they'll shop with those offering free shipping. Retailers are capitalizing on these trends with our differentiated merchant offerings like merchant promotions and fulfillment options. And we're making improvements to significantly boost the number of deals shown to shoppers in Search this holiday season. Look out for more in the coming days about new ways we'll help shoppers browse deals across the web this year. Number three. No surprise, omni-channel is the way to succeed. With our suite of omni product solutions, including local inventory ads, omnibidding, and PMax for store goals, retailers, big and small, are capturing demand and incremental store budgets while engaging with high-value customers. Innovation continues across our shopping and merchant experiences powered by Google AI. Our virtual try-on tool for apparel launched in June and has been a hit with consumers and brands. Users engage with virtual try-on images at a higher rate versus regular brand-provided images. Product Studio is another launch from GML getting positive feedback in pilot mode. It uses the best of Gen.AI to help businesses create unique and tailored imagery for free that they can then scale across their channels. We're seeing early merchant testers using it to seasonalize their content for the holidays. Let's shift to YouTube. It's worth repeating, our intense focus on creator success coupled with our multi-format strategy are at the center of how we think about YouTube's long-term growth. Shorts, connected TV, and our subscription offerings are key drivers here, and we're investing across each to solidify YouTube's position as the best place to create, the best place to watch, and the best place to deliver results. Sundar mentioned watch time and engagement momentum on shorts as well as our monetization progress. He also covered subscription growth and NFL Sunday Ticket. As for connected TV, we continue to be the number one overall streaming destination according to Nielsen. 150 million plus people are watching YouTube on CTV screens every month in the US. Whether it's music videos, NFL Sunday Ticket, free movies, shorts, a continuous stream of MrBeast, or some other creator-led content, viewers want choice and variety, and we're giving it to them all in one place. And to help creators and advertisers connect with these billions of viewers across moments, screens, and formats, we're bringing Google AI to awesome new creation tools and ad solutions. AI will do wonders for creation and storytelling. From Dreamscreen and YouTube Create, which Sundar talked about, to features that audit content in multiple languages, flip and trim existing assets, remix and clip videos, and more, we're just getting started. We're also helping brands break through at speed and scale across the funnel to drive results. Spotlight Moments launched last week. It uses AI to identify trending content around major cultural moments for brand sponsorship opportunities. There's video reach campaigns, which are expanding to in-feed and shorts and will be generally available in November. AI is helping advertisers find as many people as possible in their ideal audience for the lowest possible price. Early tests are delivering 54% more reach at 42% lower cost. And then with video view campaigns, AI is serving skippable ads across in-stream, in-feed, and shorts and helping advertisers earn the maximum number of views at the lowest possible cost. So far, they're driving 40% more views on average versus in-stream alone. Then for YouTube and other feed-based services, there's our new Demand Gen campaign, which launched in April, rolled out worldwide last week, and was designed for the needs of today's social marketers to engage people as they stream, scroll and connect. It combines video and image ads in one campaign with access to 3 billion users across YouTube and Google and the ability to optimize and measure across the funnel using Google AI. Demand Gen is already driving success for brands like Samsung and Toyota. Before I wrap, one quick highlight on our close collaboration and commitment to our most important ecosystems and partners. In July, we launched Google News Showcase in the US, our curated online news experience and licensing program with more than 150 news publications, 90% of which are local or regional. Globally, over 2,500 news publications have signed onto News Showcase, and the product is live in 23 countries today. Our commitment to open access to news and information remains strong. With that, I'll end with a thank you to our customers and partners around the world for their continued trust and collaboration, and our Googlers everywhere for their incredible hard work and dedication. Ruth, over to you.

Thank you, Philipp. We are very pleased with our financial results for the third quarter, driven by meaningful growth in Search and YouTube and momentum in Cloud. My comments will be on year-over-year comparisons for the third quarter, unless I state otherwise. I will start with results at the Alphabet level followed by segment results and conclude with our outlook. For the third quarter, our consolidated revenues were $76.7 billion, up 11% in both reported and constant currency. Search remained the largest contributor to revenue growth. In terms of expenses, total cost of revenues was $33.2 billion, up 7%, primarily reflecting other cost of revenues of $20.6 billion, which was up 6%. Growth here was primarily driven by content acquisition costs mainly for YouTube subscription offerings. As noted in our earnings release, the overall increase in data center and other operations costs was partially offset by a reduction in depreciation expense due to the change in estimated useful lives we made starting in the first quarter of the year. Operating expenses were $22.1 billion, up 6% reflecting the following: first, an increase in R&D expenses, driven primarily by compensation; second, an increase in G&A expenses, reflecting the impact of charges related to legal matters; and finally, sales and marketing expenses, which were relatively flat to last year. Operating income was $21.3 billion, up 25%, and our operating margin was 28%. Other income and expense was a loss of $146 million. Net income was $19.7 billion. This reflects an effective tax rate of 7% in the third quarter from an IRS change related to the use of foreign tax credits, which had an outsized impact on the third quarter rate because the change resulted in a catch-up for prior periods. We delivered free cash flow of $22.6 billion in the third quarter and $78 million for the trailing 12 months. We ended the quarter with $120 billion in cash and marketable securities. As a reminder, our cash balance and free cash flow in the second and third quarters benefited from the deferral of certain tax payments to the fourth quarter of 2023. As noted in our earnings release, on October 16, we made an estimated tax payment of $10.5 billion related to this deferral, which will be reflected in our cash balance and free cash flow in the fourth quarter. Turning to segment results. Within Google Services, revenues were $68 billion, up 11%. Google Search and other advertising revenues of $44 billion in the quarter were up 11%, led again by growth in retail. YouTube advertising revenues of $8 billion were up 12%, driven by both brand advertising and direct response. Network advertising revenues of $7.7 billion were down 3%. Other revenues were $8.3 billion, up 21%, primarily reflecting growth in YouTube non-advertising revenues driven by subscriber growth in YouTube TV followed by YouTube Music Premium. TAC was $12.6 billion, up 7%. Google Services operating income was $23.9 billion, up 27%, and the operating margin was 35%. Turning to the Google Cloud segment. Revenues were $8.4 billion for the quarter, up 22%. GCP revenue growth remained strong across geographies, industries, and products, although the Q3 year-on-year growth rate reflects the impact of customer optimization efforts. Google Workspace also delivered strong revenue growth, primarily driven by increases in average revenue per seat. Google Cloud had operating income of $266 million, and the operating margin was 3%. As to our Other Bets, for the third quarter, revenues were $297 million and the operating loss was $1.2 billion. Turning to our outlook for the business. With respect to Google Services, first, within advertising. After a period of historic volatility, we were pleased with the year-on-year revenue growth of Search and YouTube advertising in the third quarter. Second, within other revenues, in our YouTube subscription products, the substantial growth in revenues primarily reflects subscriber growth. Looking ahead, a full quarter of NFL Sunday Ticket revenues as well as associated content acquisition costs will be reflected in Q4 results compared to only a few weeks in the third quarter. Play had growth in the third quarter, driven primarily by an increase in the number of buyers. With respect to hardware, there is a headwind to revenues in the fourth quarter, reflecting efforts to optimize the portfolio with tighter targeting of our go-to-market investments as well as the ongoing impact from the difference in launch timing for the Pixel 6a and 7a that we mentioned last quarter. Turning to Google Cloud. We are pleased with the ongoing customer engagement with GCP and Workspace and the potential benefit of our AI solutions including infrastructure and services such as Vertex AI and Duet. We continue to invest aggressively given the significant potential we see while remaining focused on profitable growth. In terms of expenses and profitability, we're pleased with our operating performance. As we have repeatedly stressed, we remain focused on durably reengineering our cost base to create investment capacity to support our growth priorities, most important of which is with AI. We have a number of workstreams in place. First, we are maintaining a slower pace of headcount growth, reflecting product prioritization and reallocation of talent to support our most important growth opportunities. Second, we remain focused on optimizing our real estate footprint, including how and where we work to reduce our expense growth. As you can see from our earnings release, we incurred $207 million in accelerated rent and depreciation in the third quarter related to these actions. Third, we have engineering workstreams underway to improve productivity across Alphabet. Given the magnitude of investment in our technical infrastructure, we have a superb team focused on the efficiency of our operations there. We are also making progress in streamlining operations across Alphabet through the use of AI. Finally, there are ongoing workstreams that are improving the efficiency of our spend with suppliers and vendors through our central procurement organization. And to be clear, across the portfolio of other bet companies, we have also been working to identify opportunities to create sharper focus and to operate more efficiently and effectively. With respect to sequential quarter-on-quarter trends, two further points. First, cost of sales in the fourth quarter will reflect both higher hardware costs given Pixel family launches as well as increased CAC for YouTube as previously noted. Second, as usual, we expect sales and marketing expenses to be more heavily weighted to the end of the year, in part to support product launches in the holiday season. Finally, our reported CapEx in Q3 was $8 billion, driven overwhelmingly by investment in our technical infrastructure with the largest component for servers, followed by data centers, reflecting a meaningful increase in our investments in AI compute. The growth in reported cash CapEx in Q3 is somewhat muted due to the timing of supplier payments, which can cause variability from quarter-to-quarter. We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024. In closing, we remain very excited about the opportunities ahead and committed to delivering sustainable financial value. Thank you. Sundar, Philipp and I will now take your questions.

Great. Thanks for taking my question. I have two. The first one, maybe a sort of a jump ball. There's somewhat of an investor debate about sort of the incremental return on capital to Search when it comes to AI. I know it's early, but are there any examples that you're seeing with SGE or Bard on higher utility, higher conversion rates, more engagement, just something to sort of show signal around the return that could come from these investments? And the second one, Ruth, I know you've spoken a lot about durably reengineering the cost base. I think in the past, you've talked about how expenses could grow slower than revenue in 2024. Is that sort of still the high-level way to think about it or is that potentially changing a bit as investments are continuing? Thanks.

Ruth, do you want to take the second part?

Thank you, Brian. Overall, it's important to focus on growing revenues at a quicker pace than expenses as we aim to provide sustainable financial value. This leads us into the work streams I've mentioned, which remain our key focus. These initiatives are essential for us to control expense growth while simultaneously supporting the exciting investment opportunities ahead of us, especially in AI.

And to your first part, obviously, we see AI as a foundational platform shift and are excited about the opportunities across our business. It starts with Search. And I've been pretty pleased with how the user feedback has been on SGE. We are rolling it out to more users. Through it all, we are making sure the product works well, and we are generating value for our ecosystem, and that adds transitions as well. And I think I view this with AI, the opportunity to evolve Search and Assistant over the next decade ahead. And I think as we've always seen, when you continue to invest and build great experiences, you can get value on the other side. And I do think over time, there will be newer paths, just like we have done on YouTube. I think with the AI work that our subscription models is a possible path as well. And obviously, all of the AI investments we are doing applies across Cloud, too, and I'm pretty optimistic about what's ahead there as well.

Great. Thank you, both.

Thanks for taking the questions. One for Sundar and one for Ruth. Just, Sundar, you talked a lot about AI. I was hoping you could talk more about Gemini and how we'll differentiate from other models, some of the multimodal capabilities and what new experiences or agents do you think it could unlock and how we should think about timing? And then also just on Cloud, I hope you can talk about some of the factors there on the deceleration in Cloud and just what you're seeing in terms of optimizations? And is there any sign of new workload deployments taking place? Thanks.

Thanks. Good questions. On Gemini, obviously, it's effort from our combined Google DeepMind team. I'm very excited at the progress there and as we're working through getting the model ready. To me, more importantly, we are just really laying the foundation of what I think of as the next generation series of models we'll be launching throughout 2024. The pace of innovation is extraordinarily impressive to see. We are creating it from the ground up to be multimodal, highly efficient tool, and API integrations, and more importantly, laying the platform to enable future innovations as well. And we are developing Gemini in a way that it is going to be available at various sizes and capabilities, and we'll be using it immediately across all our products internally as well as bringing it out to both developers and cloud customers through Vertex. So I view it as a journey and each generation is going to be better than the other, and we are definitely investing and the early results are very promising. On Cloud, maybe what I would say is, overall, we had definitely started seeing customers looking to optimize spend. We leaned into it to help customers given some of the challenges they were facing. And so that was a factor. But we are definitely seeing a lot of interest in AI. There are many, many projects underway now, just on Vertex alone, the number of projects grew over 7x. And so we see signs of stabilization, and I'm optimistic about what's ahead.

Thank you, Sundar.

Thank you sir, very much for taking the questions. Two, if I could. Sundar, you guys led over a year ago, starting with Performance Max. And I wanted to know if we could get your updated thoughts on how AI might impact the broader advertising industry and how you're aligning Alphabet in Google's goals with AI and where it might take the advertising industry in the years ahead? That would be the first question. And then about a year ago, Philipp and Ruth started talking about some of the brand advertising headwinds that YouTube was facing. As we start to lap those headwinds, how should we be thinking about a broad recovery in brand advertising versus elements of still headwinds that are being faced in the broader ad space, specifically with YouTube? Thank you.

I can start with the first question. We're very happy with the performance of Performance Max. It offers advertisers optimal performance across all inventory through a single AI-driven campaign, showcasing AI in action within our ad products. It's providing excellent return on investment, with users typically seeing over 18% more conversions at a similar cost per action. Since its rollout about two years ago, we've expanded its features, giving advertisers more control over its operation. This includes options like account-level negative keywords and additional functionalities. We introduced new customer life cycle goals and revamped the asset creation flow, which assists businesses in adapting and scaling their most effective creatives. This is something to keep an eye on. We will also keep developing new Performance Max features based on feedback from advertisers, and we're very encouraged by the progress we've made here. Regarding your second question about customer feedback, many are focused on driving ROI and efficiency. The consumer landscape is rapidly changing and unpredictable. Our AI tools are well-received, and there is significant interest in AI and generative AI. Nearly 80% of our advertisers are using at least one AI-powered search ad product. We're getting positive feedback on our ads AI essentials, which are key in leveraging AI for sustainable ROI growth for advertisers. These include foundational tools for data and measurement, like Google Tag and Consent Mode, along with Performance Max and our various generative AI products. There's considerable interest in all of these offerings.

And then on to your second question regarding YouTube, as we said, overall year-on-year growth in revenues was driven by both brand advertising and direct response. But very much to your question, yes, there was a stabilization in spending by advertisers. We're really pleased about that. We're particularly pleased about the ongoing performance in the Living Room and on Shorts. And as I said, that's both watch time growth and monetization I'd say the other thing benefiting YouTube is the retail strength we talked about with Search, retail strength in APAC in both Search and YouTube, and that really began in the second quarter, continued in the third quarter, but that was another contributor. So quite a number of things going on. I feel good about the results the team was able to deliver here.

Thank you so much.

Great. Thanks for taking the question. Two, if I can, First, as we just think about the rollout of SGE across the user base, like how far along is that? And how do you balance the product rollout and consumer uptake versus monetization in that transition? And then the second one, also sort of Generative AI related. How quickly are you guys finding new ways of optimizing whether that's shrinking model sizes, chip efficiencies or anything else? And do you think overall capital intensity of the business scales up or do you just find ways to do this more efficiently as usage scales? Anything you could share there would be great. Thanks.

Regarding SGE, we are in the early stages of its rollout, but we've reached a sufficient audience across different geographic and user segments to confirm that the product functions effectively. It enhances the user experience; however, we recognize there are areas for improvement that we are refining. Our main focus is on achieving the ideal user experience, and we are pleased with the current trajectory. We have successfully navigated transitions before, whether from desktop to mobile or now from mobile to an AI-enhanced experience. This is not a new challenge, and I am confident that our teams, both on the organic and advertising sides, will deliver the right experience for users, which includes advertising, and will yield positive results. We will continue to refine and make headway in this area. On your second question, overall, as we celebrate our 25th anniversary, I take pride in the strength of the work we have accomplished in building our company's infrastructure and the various stages we've experienced with new technology adoption. We have always considered the costs and have consistently driven impressive efficiency improvements. I believe the current situation is no exception. Throughout this year, we have achieved significant efficiencies in our models, training costs, serving costs, and our capacity to adapt to the appropriate use cases. We are committed to ensuring we have the best AI models and infrastructure in the world and will continue to enhance efficiencies moving forward.

Okay. Thank you.

Thank you. I'm going to ask you guys a multipart question on YouTube TV. So firstly, what were the broader objectives for getting Sunday Ticket? How does it perform versus those objectives? What lessons have you learned from having the NFL Sunday Ticket, and how does that affect your appetite for more sports going forward? Thanks.

As Sundar mentioned earlier, we are a few weeks into our first season, and we are very happy with how it is progressing. In a broader perspective, this fits into our overall YouTube subscription strategy. The positive feedback we have received about the YouTube experience is extremely important. Users appreciate the navigation, enjoy multi-view, and like the chats and polls. Additionally, people are pleased with the minimal latency. The most significant feedback from our team is that users want the option to select their own games in multi-view, which is the exciting feature we have begun rolling out on YouTube TV that allows fans to watch multiple streams simultaneously. Overall, our teams are dedicated to creating an excellent experience, and we are focused on ensuring our first season is successful while providing the best experience possible for our fans.

Thank you.

Great. A couple of questions on Q4. Can you provide any color on if there's been any pause in advertising around the Middle East conflict in October, anything we should be aware of for Q4? And then second, when we do think about the Sunday Ticket impact, I know you can't give us revenues or expenses, but overall, would that be a headwind to margins in Q4 or something we should be thinking about? Thank you.

Regarding your first question, this is a truly tragic situation, and it is difficult to express the gravity of what is happening. Our primary focus has been on supporting our team affected by this and figuring out how our products can provide help during this painful time. I don’t have much more to add on that. Concerning your second question about Sunday Ticket, I want to highlight that this is the first full quarter where Sunday Ticket is contributing to our subscription revenues. This also plays a part in the increased customer acquisition costs we are seeing in the fourth quarter. We aim to clarify that point. Looking ahead, we are optimistic about achieving a solid return over the duration of the deal. We are continuing to invest in support of this initiative and are enthusiastic about the additional opportunities it presents, including collaborations with partners to provide clips and other offerings. We have received positive feedback from our NFL partners regarding the new features and the reliability of the live stream. This is a clear demonstration of our capacity to successfully manage large partnerships at scale and make the most of the exceptional advantages that YouTube and Google offer, which excites us.

Great. Thank you.

Thank you very much. I have two questions. First, how do you view the future structure of AI-driven search capabilities? Will the activity stay centralized in a search bar, or will it become more decentralized, appearing in various applications, including those from third parties? You mentioned Bard being integrated into several Google experiences earlier. My second question is about the update on the Chrome cookie deprecation plan set to start in the first quarter of 2024. What insights have you gathered so far from your early testing of the privacy sandbox, and what feedback have you received from advertisers?

On your first question, look, I broadly think of it as people are looking for information. They always look for it in many, many different ways. We've given the product search example. People can directly go to Amazon as an example or come to Google. So if you zoom back and take an information view of the world, there's always been many different ways to get it. And part of our work we do in making Search be world-class and give users what they're looking for so that we can get it as much of that intent as possible. So I don't see that changing. With mobile, there were more ways people could get information, but we worked out to make Search work better in the mobile world. And similarly, a view with AI, there'll be many ways people get information, but it also offers us an opportunity in Search and in Assistant to take it to the next level and answer use cases, which we couldn't have done before and expand the diverse set of needs where we are sourced. So that's how I see the opportunity ahead.

And to the second part of your question, yes, Chrome still plans to begin phasing out third-party cookies in the second half of '24. In the last several months, Chrome has really made significant progress on the privacy sandbox with APIs for developer testing, and they're not generally available in Chrome. Our ads team is testing these APIs. As we shared back in April, the preliminary results of our interspace ads testing showed that a combination of what we call privacy preserving signals and AI optimization actually provides positive results for businesses preparing for a cookie-less future. We also recently announced that in Q1 of '24, we plan to deprecate third-party cookies for 1% of Chrome users, and this will support developers, obviously, in conducting their real-world experiments to assess the readiness and effectiveness of their products without third-party cookies. And we're overall encouraged by the ecosystem engagement on privacy sandbox. We'll continue to work with the industry and regulators on how these technologies can support the transition to, frankly, a more private web.

Thank you.

Thank you. Two questions, please. Ruth, you talked about these elevated levels of investments in Q4 and in '24. I'm sorry, were you referring to just CapEx or CapEx and total expenses? And then on the comments around stabilization in Cloud, is this something that you just started to see in the September quarter? Or had you seen that starting earlier in the year? And if you just started seeing it in the September quarter, would you have any thoughts on why you would have seen it like Google Cloud would have seen it maybe later than some of the other hyperscalers? Thank you.

I believe you're asking about my comment on capital expenditures. I wanted to emphasize our commitment to significantly investing in CapEx due to the numerous opportunities we see. We still anticipate high levels of investment in our technical infrastructure, which will be increasing in the fourth quarter. I mentioned some timing differences, particularly the muted timing in the third quarter because of supplier payment timing. I want to clarify that we will continue to increase CapEx in 2024, and specifically, the total CapEx for 2024 will exceed that of the full year 2023. On the topic of Cloud, as Sundar mentioned, we're excited about the revenue growth reflecting strong customer adoption across our portfolio, including infrastructure, data analytics, and security. I cannot comment on other areas, but we feel confident about our current position and future outlook, allowing you to perform your own forecasting. The DCP growth in the third quarter exceeded the overall growth rate for Cloud, and we are pleased with the work happening in that area. Additionally, we have the contributions from Google Workspace.

Thank you.

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