Alphabet - Google Q4 2019 Earnings Call Transcript – GOOG, GOOGL - transcription powered by Happy Scribe

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Ladies and gentlemen, thank you for standing by and welcome to the Alpha, that fourth quarter 2019 earnings conference call at this time, all participants are analysts and only mode after the speakers presentation. There will be a question and answer session to ask a question during the session. You want me to press star and then 1 on your telephone. If you require any further assistance, please press star then zero. I'll analogy in the conference. Over to your speaker today.

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Allen West. Head of Investor Relations. Please go ahead.

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Thank you, Candace. Good afternoon, everyone, and welcome to Alphabet's. Fourth quarter 2019 earnings conference call. With us today are Sundar Pichai and Ruth Paret. Now 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 S.E.C.

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. During this call, we will present both Gap and non-GAAP financial measures. A reconciliation of non-GAAP to get measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations Web site located at ABC DOT X, Y, Z, Slash Investor. And now I'll turn the call over to Sundar. Thank you, Ellen, and good afternoon, everyone. It's a privilege to join the call as the CEO of both Alphabet and Google.

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After four years as CEO of Google, I'd like to start by thanking Larry and Sergei for giving all of us at Google a timeless mission, enduring values and an opportunity to have an impact on the world. There's a lot I want to cover today, and I also want to leave plenty of time for any questions you may have for me and wrote. As you've seen in our press release, we've added new revenue disclosures to give greater insight into our business.

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Search and other Google properties continue to drive great results with total revenues in twenty nineteen of ninety eight billion dollars and strong growth, also really pleased with two of our newer growth areas. YouTube reached $15 billion in ad revenues in twenty nineteen, growing at 36 percent compared with 2018. And it now has over 20 million music and premium paid subscribers and over 2 million YouTube TV paid subscribers ending 2019 at a 3 billion dollar annual run rate and YouTube subscriptions and other non advertising revenues.

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Google cloud and at twenty nineteen at a more than ten billion dollar run rate, up 53 percent year on year driven by significant growth in GCP. The growth rate of GCP was meaningfully higher than that of cloud overall and GCP growth rate accelerated from twenty eighteen to twenty nineteen. Before I talk about the highlights of the quarter, I want to take a step back and give some early thoughts about my approach to managing alphabet and other bets. We will always taken a long term view, investing in deep computer science and technology, important trends like the wider adoption and application of artificial intelligence, ambient computing and the move to the cloud underlying our investments across Google and our other alphabet companies.

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Our work in healthcare is a great example of how our investments in these areas allows us to deliver solutions across an entire sector. Google Cloud works with hospitals and health care providers to securely manage their patients data data that is much more secure in the cloud than in paper records or on premises. Our A.I. teams at Google also work with partners to apply to help them and their patients, but is developing better health systems or helping with the diagnosis and detection of disease?

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Among their broader efforts are other bets. Verilli and Calico are also partnering with industry leaders to use a-I and Cloud Technologies to improve clinical trials, research and drug development. Our thesis has always been to apply these deep computer science capabilities across Google on our other bets to grow and develop into new areas. The alphabet structure allows us to have a portfolio of different businesses with different time horizons without trying to stretch a single management team across different areas. We'll continue to take a long term view, managing the portfolio with the discipline and rigour needed to deliver long term returns.

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Many of our other bets are getting to the stage where it now makes sense for them to partner closely with other players and investors in the industry. They most technological leadership is widely reported. Its cars have driven 20 million miles across more than 25 U.S. cities. They most now serving over 15 hundred monthly active riders in metro Phoenix and continue scaling fully driverless by matching early riders with driverless vehicles and charging for these rights. As B-Mor looks to its evolution as a business, it's focusing on strategic partnerships.

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For example, it's working closely with OEMs and other businesses to build out ride hailing and delivery business lines. And Verilli is an example of a company in the portfolio that has outside investors Silverlake and Temasek, as well as its own board, will consider opportunities for some of our other bets to take similar steps over time. Now on to highlights from the quarter first search and related Google properties. As I mentioned on our last call, our neural network based technique for natural language processing called Bird is the biggest advancement in search in the last five years.

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It now impacts 10 percent of searches. And in Q4, we rolled it out in over 70 languages. In maps, we are celebrating our 15th anniversary very soon. And in the past year, we brought reliable directions to six hundred and thirty million additional people in locations that previously weren't felt mapped. We added as many buildings to maps using MRL in 2019 as we've added using all techniques in the previous decade. With all these improvements, user growth is strong and the range of things people are doing with Google Maps continues to expand as well.

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The Google assistant now helps more than 500 million monthly users across 90 countries get things done across parts makers and smart displace phones, TV's cars and more. Shopping and commerce is another exciting area. We are making strong leadership hires in this area to help build a thriving business for partners of all sizes or the Black Friday and Cyber Monday holiday weekend. We had the largest number of daily shoppers on Google com ever in our history. Throughout the entire holiday shopping season, we also expanded the selection of products on Google due to a 4x uptick in the number of U.S.

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merchants participating in our shopping action program. Second, YouTube. Speaking of shopping, people can now easily buy products in YouTube's home feed and in search results, making it possible for advertisers to reach even more audiences. Try searching for Pumar Shoes review on YouTube to see an example with all all the related content on YouTube like unboxing and beauty videos. This is the format people love and it delivers a simple in video buying experience. A huge focus is continuing our work to keep You Tube safe for users, creators and advertisers.

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You may have seen a blog post today about our work to promote authoritative content and remove misleading information about the upcoming 2020 elections. For example, we are applying our deceptive content policies to reduce misleading information about voting locations or the census process. As I mentioned earlier, we are pleased with YouTube's growth in advertising and subscriptions and we are also pleased with the early results from other revenue options. We offer creators including memberships, brand integrations, merchandise and ticket sales.

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Continuing on now to cloud, we are really pleased with the momentum we are seeing in cloud. Year on year, the number of deals or 50 million dollars more than double the investments in clouds go to market expansion are resulting in customer momentum. Wayfair is one of the many retailers who successfully ran holiday operations on Google Cloud. In addition, Lowe's, which began transitioning off its legacy e-commerce system in late 2018 to Google Cloud, worked with us during this year's speak holiday buying season to improve the stability of their e-commerce site.

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Worth noting, at peak time, customers in our Black Friday slash Cyber Monday program used for extra compute resources compared to previous year and our platform experienced 100 percent uptime. Lufthansa Group is using our A.I. solutions to develop new tools that will improve air travel operations. The U.S. Postal Service also chose Google Cloud A.I. to improve business processes and customer experience. We have recently signed a 10 year agreement with Sabor to help them improve operations and develop new airline and hospitality services.

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Finally, Google other revenue Android continues to thrive. I'm proud to announce that over 80 billion dollars has been earned by developers around the world from Google Play showing the popularity of our platform. There are now over 2 billion active monthly users of Google Play. Hardware is still in the early stages of delivering on our vision for ambient computing. Our home devices demonstrate how this mission can come to life. In creating the home of the future with our new nest, many a nest hub Macs selling well over the holidays.

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Following on from the picks of 3:08, which sold well last year, but picks of four. We continue to build out our capabilities and are keenly focused on execution. Delivering great user experiences and broadening our distribution and our pending acquisition of Fitbit will give us a foundation in variables. I'm excited about our roadmap ahead across our products. Overall, in 2020, our teams at Google are focusing on four key things. First, creating the most helpful products for everyone.

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We're really focused on ensuring that our products like search maps and assistent are helping people in their daily lives. Second, providing the most trusted experiences for our users, we are doing lots of forum to keep improving users privacy and security while also keeping harmful content off our systems. Third, executing at scale. This will show up as more seamless products across various surfaces and platforms like the Google assistant. Deeper partnerships and better use of our shared infrastructure. For example, Activision Blizzard recently chose Google as a strategic partner using Google cloud computing infrastructure, YouTube for livestreaming and R.E.

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items. Putting together these multi-product partnerships helps us unlock great opportunities for our partners. And Ford creating sustainable value. This means optimizing our usage of computing resources and also growing businesses. Business opportunities in areas like YouTube, cloud play hardware and beyond. So as you can see, there's a lot happening at the company and a real sense of excitement and focus. I want to thank our employees for all the great work in 2019. With that, I'll turn it over to Rick.

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And I look forward to your questions.

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Thanks, Sundar. We're very pleased with our strong 2019 results with total alphabet revenues of $162 billion up 18 percent year on year or 20 percent in constant currency in dollar terms. This represents an increase of $25 billion in revenues relative to 2018. I will review our quarterly and annual results, including our new revenue disclosures and conclude with our outlook center. And I will then take your questions. Starting with consolidated alphabet results in the fourth quarter, our total revenues were forty six point one billion, up 17 percent year on year and up 19 percent in constant currency.

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Our results were driven by ongoing strength in search YouTube and Google cloud offset by a decline in hardware revenues. Details of Alphabet's consolidated revenues by geographic region are available in our earnings press release regarding our key expense lines on a consolidated basis. Total cost to revenues, including TAC was 21 billion, up 17 percent year on year. Other cost of revenues on a consolidated basis was twelve point five billion, up 19 percent year over year, primarily driven by Google related expenses.

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The biggest factors here, again, this quarter or costs associated with our data centers and other operations, including depreciation and then content acquisition costs primarily for YouTube and mostly for advertising supported content and what has been a seasonally strong quarter for YouTube, but also for our newer paid YouTube music and premium subscription services, as well as YouTube TV, which have higher content acquisition costs as a percentage of their revenues.

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These were partially offset by a decline in costs associated with lower hardware sales. Operating expenses were fifteen point eight billion, with headcount growth being the largest driver of year on year growth for R&D and sales and marketing expenses. Headcount drives both comp. and related facilities expenses after headcount growth, the biggest driver in R&D expenses was an increase in valuation based compensation charges in certain other bets. Stock based compensation totaled 2.6 billion, headcount was up four thousand eight hundred and three from the third quarter and up 20 percent over 2018.

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Again, the majority of new hires were engineers and product managers in terms of product areas. The most sizable headcount increases were again in Google cloud for both technical and sales roles, including the impact of the Loker acquisition, which closed in December. Operating income was $9.3 billion, up 13 percent year over year for an operating margin of 20 percent. Other income and expense was 1.4 billion, which primarily reflects an increase in the market value of certain publicly traded equities, as well as a non cash gain from a Verilli transaction.

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We provide more detail on the line items within ohai any in our earnings press release. Our effective tax rate was 0.3 percent for the fourth quarter and was 13 percent for the full year the fourth quarter. ETR reflects the impact of discrete items, including the resolution of multi-year audits. As you've seen in prior years, ETR can vary on a quarterly basis. Net income was 10.7 billion in earnings per diluted share were $15 and 35 cents. Turning now to cap ex an operating cash flow cash CapEx for the quarter was 6 billion, which I will discuss in the Google segment results.

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Operating cash flow was fourteen point four billion with free cash flow of 8.4 billion. We ended the quarter with cash and marketable securities of approximately one hundred and twenty billion. Let me now turn to our segment Financial Results, starting with the Google segment. Revenues were forty five point eight billion, up 17 percent year over year. And this, of course, is on a gap or floating FDX basis. Google search and other advertising revenues were twenty seven point two billion in the quarter, up 17 percent year over year.

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Reflecting ongoing momentum in mobile and desktop. YouTube advertising revenues were 4.7 billion, up 31 percent year on year, driven by substantial growth in direct response and ongoing healthy growth in brand advertising, which remains the largest component. Network advertising revenues were 6 billion, up 8 percent year on year led by growth in Google ad manager. Turning to Google cloud, including GCP and G suite revenues for $2.6 billion for the fourth quarter, up 53 percent year over year, driven by significant growth at GCP, an ongoing strong growth A-G suite.

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The growth rate of GCP was meaningfully higher than that of cloud.

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Overall, GCP growth was led by our infrastructure offerings and our data and analytics platform. We also saw strong uptake of our multi-cloud andthose offering. Ongoing growth in G suite, continued to reflect growth in both SMB and enterprise segments and both seat count and average revenue per seat. The other revenues line now consists of Google Play, followed by hardware and YouTube's non-advertising services, mainly its subscription offerings, YouTube premium, YouTube music and YouTube TV. In the fourth quarter, other revenues were $5.3 billion, up 10 percent year over year, primarily driven by growth in YouTube and play offset by declines in hardware.

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YouTube's contribution to other revenues benefited from subscriber growth across its various offerings. Within play, app revenues had strong growth driven by an increase in the number of active buyers. Total traffic acquisition costs were $8.5 billion or 22 percent of total advertising revenues and up 14 percent year over year total TAC as a percentage of total advertising revenues was down year over year, reflecting once again a favorable revenue mix shift from network to Google properties. Google operating income was eleven point five billion, up 20 percent versus last year and the operating margin was 25 percent.

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Google accrued CapEx for the quarter was $6.6 billion, reflecting investments in data centers followed by servers and office facilities.

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Moving on to the performance of other bets for the full year 2019, revenues were 659 million, up eleven percent versus 2018 primarily generated by fiber and Verilli. Operating loss for other bets was four point eight billion for the full year 2019 versus an operating loss of 3.4 billion in 2018. Let me conclude with a few observations on the quarter and our longer term outlook based on the strength of the U.S. dollar to date relative to the first quarter of last year, we expect continued effects headwinds again in the first quarter of 2020 with our expanded revenue disclosures this quarter.

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I'll talk about the revenue and investment outlook for each of these newly disclosed component parts. First, with respect to search and other advertising, although we don't report search revenues on a fixed F X basis, the delta between fixed and floating go growth rates at the alphabet level is a good proxy for the effect on search revenues or headwind of approximately 2 percentage points in 2019 at our scale.

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We are pleased with our rate of growth for 2019 and see ample opportunity going forward. What's exciting for us as we look ahead at search and other Google properties is the ongoing opportunity to support users and advertisers with new ads, experiences and improved measurement. Second, with respect to YouTube advertising at a year on year growth rate of more than 30 percent in the fourth quarter, we're pleased with the ongoing strength and opportunity at YouTube. We see substantial continuing opportunity in direct response as well as with brand advertisers.

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As Sundar shared earlier, the non advertising services at YouTube, mainly from subscriptions, reached a $3 billion revenue run rate in the fourth quarter. We continue to invest across YouTube to grow over the long term. In the ad supported portion of YouTube, we pay out a majority of revenues to our creators reflected in our content acquisition costs on top of that. There are other expenses, including infrastructure and networking costs, as well as the costs of our content responsibility, efforts to keep YouTube safe for users, creators and advertisers.

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We're also investing meaningfully to grow our subscriptions, which have higher content acquisition cost ratios. Turning next to Google Cloud, we are very confident that there is an enormous opportunity here that plays to our core strengths. We're pleased with the growth trajectory of GCP, which we see in customer momentum, the growing size of the average contract. And of course, revenues. The traction we're having with large customers who are making multi-year commitments with us is reflected in our backlog, which ended the year at eleven point four billion substantially, all of which relates to Google Cloud.

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Given our position as a challenger, we're investing aggressively focused on building out our go to market capabilities, executing against our product roadmap, and extending the global footprint of our infrastructure focused on 21 markets and six industries in terms of hardware, as Sundar noted in his opening remarks. We remain focused on the long term opportunity with ambient computing. We believe our strengths in A.I. and software give us an advantage in providing seamless experiences to users wherever they are across multiple surfaces.

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We've been investing heavily in developing our capabilities in hardware engineering, as well as building out supply and physical distribution chains. And we've created a multi-billion dollar revenue business in the past three years. We're looking forward to our acquisition of Fitbit, which will add strong capabilities and wearables and advance our vision of ambient computing for the Android ecosystem. As we look at the near-term product roadmap, we continue to execute at a measured pace in other bets. We are sharpening our focus on the metrics and milestones against which capital allocation is determined, and we continue to assess where external capital is additive to governance and execution.

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I'll now turn to the investments we're making in headcount and in CapEx to support the growth opportunities we see across alphabet. With respect to headcount in 2019, alphabet headcount grew by 20 percent, reflecting investment in key areas such as cloud. Overall, we expect the growth rate of headcount to be slightly higher in 2020 due to the combined impact of investment in priority areas, plus the decision to move certain vendor functions in-house as well as from the planned impact of the Fitbit acquisition.

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On SPC. As a reminder, our full year equity refresh grants are made to employees during the first quarter of 2020. And you will see the step up in our first quarter results in terms of cap ex in 2020. We intend to increase our investment in both technical infrastructure and office facilities versus 2019 within technical infrastructure. The investments in particular support ongoing demand for machine learning across our business as well as for cloud search ads and YouTube relative to 2019. We anticipate relatively more spend on servers than on data center construction at this scale of investment.

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We remain very focused on driving efficiency through fleet optimization and tight management of our supply chain. Finally, on capital returns in the fourth quarter, we repurchased $6.1 billion of shares, which was more than double the amount of repurchase in the fourth quarter of 2018. As of year end, we had 21 billion dollars remaining in the program and are focused on executing on the remaining authorization at a pace that is at least consistent with what you saw in the fourth quarter.

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In conclusion, we remain very confident about the opportunities across alphabet and in our ability to continue to deliver at the steady pace we've shown. Sundar and I will now take your questions. Thank you. As a reminder to ask a question, you want me to press star and then 1 on your telephone to withdraw your question, please press the pound key to prevent any background noise. We ask that you please line once your question has been stated. And our first question comes from Heather Bellini from Goldman Sachs.

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Your line is now open. Hi. Thank you very much. Ruth and I sure are going to hear this a million times tonight, but thank you so much for the enhanced disclosure. I think this is the best Google Call or Alphabet call I've I've been on since I've covered the companies. So so thank you again. And you've given us a lot of stuff here. I just wanted to focus a little bit on GCP and the comments that you made.

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And either if you want to think about this for Google Cloud collectively or just for GCP, just given the revenue run rate that you're at, how do we think about deep? The gross margin profile of this business is? It's fair to look at some of the other cloud players when they were disclosing similar run rates to get a sense of what their gross margins were for. Is there a reason why your business might look slightly different? Thank you so much again.

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Thank you for those comments. So, you know, first and foremost, obviously, we're really pleased with with the momentum here, GCP had fantastic revenue momentum in the fourth quarter and as we noted, is growing at a meaningfully higher pace than in Google cloud overall in terms of your margin question. You know, look, I think our our view is obviously the competitive dynamics in the cloud market are very different today. We are investing aggressively, given the opportunity, which I tried to make clear in opening comments.

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You know, given the opportunity we see in the momentum we're having, we we've accelerated our investment in our go to market team. And as we've talked about before, we've set a goal to triple the size of the sales force. We're also focused on building out our product roadmap and extending the global footprint of our infrastructure. And I'll leave the forecasting to you. Thank you. Thank you. And your next question comes from Eric Sheridan from UBS. Your line is now open.

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Thanks so much. Maybe you get to participate in some of our few. First, a lot of innovation at the company put on display over the past year. Ruth talked in her sort of forward commentary section about sustainability of growth and outperformance going forward. What are you most excited about when you see the company trying to align what improves consumer utility along with what continues to drive growth in the various segments of the business? That would be number one and two groups maybe for you.

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You would talk about variability of revenue last quarter going into Q4. But unless I missed that, I don't think you use the same word again in Q4. What were you expecting in terms of variability in Q4? And any color you could give on how that played out or how we should be thinking about variability of revenue going forward. Thanks so much. Eric Kight, I think overall, I presume you mean across everything we do, and if that's the case, you know, I mean, I am.

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I mean, the trends we are seeing and we've been investing on it for a while, but, you know, applying it, I'm actually driving use cases to users. So, for example, you know, using A.I. to dramatically improve natural language processing, to make 10 percent of our search results better is a kind of opportunity I'm excited by. You know, when I look at we do see a lot of commercial experiences across our property, speed search her YouTube and the opportunity to create a better experience there and hence bring more value to our users.

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That's something which we see as a big opportunity. And across our businesses, be it YouTube cloud, play our hardware in addition to search, you know, we are seeing strength in a lot of these areas and and we share a common technological approach across all of them. And so that gives us a synergistic way to approach these areas as well.

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And then on your second question, you know, at our scale where we're pleased with the rate of growth in 2019 here in search in our ads business overall, and we do see ample opportunity ahead when we talk about variability of revenue. The way we've talked about it in the past very much holds true, which is where we don't manage for any particular quarter. We manage focused on what's in the best that's for users and and with a lot of testing that goes around it.

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And so really the point is there will be variability and and we're focused on continued the continued long term opportunity. And we do see that opportunity, the adds opportunity to be significant. You know, apart from the secular shift to digital, we continue to be very focused on the the benefit from better measurement, better ad delivery, better user experience. Our view is that all helps grow the addressable market, but there will be variability over time because we're very focused on what's in the right long term interest.

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Thank you. Thank you. And your next question comes from Doug Annette from J.P. Morgan. Your line is now open. Great. Thanks for taking the questions. One for sunderer and one for Ruth sunderer. First, just hoping you could talk more about Google Cloud. Great to see the 10 billion dollar run rate. I'm just curious if you can help gauge the progress over the past year. And where do you think the biggest areas of differentiation lie in an increasingly competitive space?

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And then, Ruth, could you give some of your latest thoughts on balancing growth and profitability across the Google segment and other bets as you enter this year? Do you see additional opportunities to drive increased profitability without impacting the long term potential of the businesses? Thanks. On cloud. You know, I think maybe, maybe a few thoughts on some of the progress you made last year and talk about the differentiation which you asked about as well. You know, definitely under Thomas's leadership, you know, I think we have clearly focused on, you know, six industry verticals across 21 markets.

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And so doubling down on those efforts. Brit bringing in a lot of new products and compliance certifications. So effectively expanding the TAM, which we serve right mention. The team is on track to triple our sales force in three years, including bringing in a number of senior strategic hires and supplementing it with a channel partnership program. I think the progress I've seen in our customer focus with our customer success organization and the contracting framework have all been great progress for us overall.

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You know, every time we in especially in one of these larger deals, they're effectively looking for a technology partner. So differentiation is not just what we bring to table in terms of cloud, very of differentiate differentiated capabilities, but in many cases it's what we bring us Google. So if you take an area like healthcare, all investments, we are making healthcare across Google and in some cases Alphabet. If you look at Sabor, the partnership we can bring to them across our experience working in travel verticals as well.

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So I think, you know, an over time, I also think the a-I based industry specific solutions we are working on will end up being a differentiating factor as well. And in terms of your second question, investing for growth and how we bounce growth and profitability. You know, the the approach to capital allocation and the pace of investing in.

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Continues to be guided by the same three drivers that we've talked about previously. First and most important is investing to support the long term earnings growth and the opportunities that we see there. Second, we do remain focused on optimizing investments within each product area. And then third, as we've talked about on prior calls, is investing to support operational excellence. And that includes things like driving efficiencies in our technical infrastructure, which I spoke about. You know, when we look at the biggest investment areas within Google, we as we've talked about already on this call, continue to be focused on investing to support the growth that we see.

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It starts with search, you know, while also investing to build new businesses. And we've talked about a couple of them already today. Cloud is clearly an area where we're investing aggressively in hardware. We've been investing heavily, you know, by developing our capabilities in hardware engineering, as well as building out supply and physical distribution chains. And then in YouTube, as I mentioned in opening comments, we do continue to build out our subscription services. It's still in the early days there and we're making a sizable investment to build it out, taking a long term view here.

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So, you know, we are leaning into investing for long term growth. That's been a core principle here and remain such while looking at where can we optimize within portfolios and where can operational efficiencies be additive? Great. Thank you both. Thank you. And our next question comes from Brian Nowak from Morgan Stanley. Your line is now open. Thanks for taking my question. I have to toss to Senator that you're a 2020 focal points are really helpful, creating the most helpful products for everyone and then the most trusted experience for users was serious focus in those comments on payments and YouTube, even though a lot of payment strategies over the last couple of years.

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So talk about what types of investments or products you think you need to really remove friction and drive better payment adoption. And then on the YouTube side, if you sort of look at how people are using YouTube now from an engagement perspective, what types of changes do you foresee? You need to make an order really making them more helpful products and drive engagement even higher on the YouTube platform. Thanks. Brian, thanks. On on the on the payments side.

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You know, clearly, you know, I spoke earlier about the kind of experiences people see across our properties and including people do come with an intent to discover, learn and commercially engages while and when they're looking to transact payments ends up playing a critical role. So the less friction you have, it tends to work better. So we've been really focused on doing that and getting more of our users set up in the right state. We've had a lot of traction with our payments product over the past 18 months.

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We we had a tremendously successful launch in India from which we we learned a lot of features and we are bringing that and we are revamping our payments products globally. And so I'm excited by that rollout, which is coming up in 2020. I think that will make the experience better on the YouTube side.

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You know what? I guess your question is about, you know, how are users engaging with the part of all you know, all our user metrics are very strong, the global in nature. And increasingly, we are seeing we see newer verticals beginning to grow as well. So YouTube is working horizontally well at scale. And for us, it's making sure as the ecosystem, it works better so that the content there, the experiences there are improving are we take our content responsibility work seriously, which makes more content creators engage and makes it more valuable part product for advertisers as well, but also supplementing the content you see there with other types of, you know, accessorizing things, speed, merchandising, ticket sales.

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You know, when we make it contextually relevant, what we have done in search and search ads over time, if we can bring that out to YouTube and we see an opportunity, I think I think that sets us up well for the long term. Great, thanks. Thank you. And our next question comes from Brent Dyl from Jefferies. Your line is now open. Thanks, Ruth. In North America. Was there anything that was abnormally unusual?

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Facebook had cited some weakness in North America. It looks like your North America number was relatively weak versus the last, you know, four years observed. Was there any anomaly that we should be aware of? Thank you.

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Thanks for that. So the the regional breakdown also reflects product mix within regions. The U.S. year on year growth rate does reflect a decline in hardware revenues relative to what was a fairly strong hardware revenue growth rate in 4Q 18 and not much more to call out than that. Thank you. And our next question comes from Steven Chu from Credit Suisse. Your line is now open. Thank you. So send out, I guess, some of the more cross product lines, synergies are showing up and integrated software and hardware effort, stuff like the pixel.

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But you know, you've come up through the ranks at Google. So you're undoubtedly pretty sensitive to the various interests across various teams. But, you know, we're wondering what you may be looking to do to break down, I guess, what might have been more of a siloed effort in Google's history. Thanks. You know, I think, you know, I spoke about execution at scale and. And so for us, that means, you know, you have these product areas which are focused on their users, but VR setting up teams which cut across all these areas and make sure they can bring the synergies and work at scale.

[00:40:49.05]
So last year we set up a core infrastructure team which looks at things like, you know, how does the user journey work across? What is a shared infrastructure? Engineers can you so that we don't reinvent the wheel in multiple areas? How can we commonly deploy A.I. across all these products? So I think that's that's been a good example of bringing teams together. Another big area where we invested like that to break down silos is our partnerships. We set up a global partnership steam.

[00:41:23.03]
And our ability to bring a common Google perspective to our big global partners. It's helped us strike May new partnerships. I mentioned Activision Blizzard as an example and they work and they are very synergistic with cloud as well. To my point earlier, when people engage with us on cloud, they're looking for their interest in a bigger digital transformation across the board. Google assistant is a great example of because we are focused on the user and experience cuts across several of our product areas as being a great mechanism by which we can break down silos as well.

[00:42:01.05]
But but it's a great question and I spent a lot of time on it. Thank you. And our next question comes from Dan Salmon from BMO Capital Markets. Your line is now open.

[00:42:14.09]
Good afternoon, everyone. I had two questions when clarifying one for Ruth and then maybe a big picture, one for Sundar. Ruth, you distinguish between the growth of brand advertising and direct response on YouTube. Those comments were very clear. I just want to follow up and ask you just how you make that distinction between brand and direct response. Is it different pricing model? Is it the presence of ad revenue share with a creator or both? And just be curious on that distinction.

[00:42:41.06]
And then to Sundar, the big picture one. You know, we have heard others in the ecosystem talk about headwinds from targeting growing. Certainly there are regulatory changes that also apply to you. You've made some some changes to various Google advertising platforms. And of course, you're an owner of two of the largest, most important platforms in Chrome and the and the Android operating system. I could ask you a billion things on that last one, but what I'd really like to ask is the big picture question.

[00:43:09.01]
If we roll up these sort of things for your total advertising business, how important are changes here to see your top line growth? Are you seeing notable headwinds from these types of changes in the ecosystem as well? Thanks.

[00:43:24.01]
So on the first one we have again this quarter talked about the brand and direct response. And as we've talked about in prior quarters, you know, brand is growing at a healthy pace and remains the largest component of of YouTube ads. Direct response is growing, continues to grow at a very substantial growth.

[00:43:45.04]
The distinction here is the formats for, you know, in direct response were letting brands insert a tailored call to action in a video ad such as signing up for a newsletter or scheduling an appointment or downloading downloading an app or booking a trip. Things are those sort. And that's why it's a direct response category. And on the broader questions about headwinds. You know, I you know, it's something, you know, we always need to take a look at.

[00:44:13.09]
You know, we try to stay focused on users and our partners. And we realize for these things to scale, you know, you need to make sure the ecosystem is working well. And and so we are engaged in these issues and and we anticipate and structurally work on them early on. So it's how we broadly approach these things. And so there's nothing notable to call out other than, you know, you know, there will be continued, you know, changes in these ecosystems and know our ability to anticipate and adapt is key, key to the years ahead.

[00:44:55.00]
Thank you. And our next question comes from Justin Post from Bank of America Merrill Lynch. Your line is now open. Great.

[00:45:02.06]
Thank you. I'd like to ask a couple of bigger picture things on the new disclosure. So. So first, on YouTube monetization, Chemi, that 2 billion users. It's about seven or eight dollars per user. Just wondering how you feel about that monetization level, given all the usage you're seeing there? And is there significant room to raise that when you compared to other social networks? And then secondly, on the cloud backlog, very strong number eleven point four versus R.

[00:45:29.00]
I asked pass revenue rates. Just wondering about how strong the new deals have been that you've seen the last six months. Sounds like really good traction there. And then the profitability of these deals. Hey, how you feel about that? Thank you.

[00:45:45.06]
On the question on YouTube, you know, I do think there is a lot of opportunity ahead. You're right. It's a platform working at scale. I think Rich spoke a little bit about and direct response. I think direct response is a huge growth area for us. And and increasingly, I think when you look at the fact that people are consuming a lot of goods and services as part of their experience in YouTube, how can we create better commerce experiences?

[00:46:18.07]
Also, it's a big opportunity for us. So looking across, I think there is more room, significantly more room for the mid to long term on monetization levels. And so I think we see that as a big opportunity and are investing for it on cloud. Definitely. You know, we are increasingly doing much larger deals and and, you know, these deals can sometimes span beyond cloud as well and they can touch many areas. So as an example, if you're an automotive company, we can be talking to you across Cloud, Android Auto, in some cases B.M.

[00:47:02.05]
, and they all happen to be strong platforms partners on the advertising side as well. So these are large deals. And and, you know, we we do want to build this in a sustainable way so that we can. So the partner. Well, and so profitability has been something we're very focused on as well.

[00:47:18.00]
And just to add a little more to that, you know, we're the the eleven point four billion backlog number is, you know, for us, we view it as a way to quantify the traction that we're having. And as you know well in the enterprise faces, these tend to grow over time and profitability as such comes across the cohorts. However, the point that we were trying to make and have made a couple of times here on the call is we are investing aggressively in crop cloud.

[00:47:47.01]
Overall, given the opportunity that we see in the momentum we're having and we'll continue to do so. Thank you. Thank you. And our next question comes from Youssef Squali from SunTrust. Your line is now open. Okay, great. Thank you. Two quick ones. First, Ruth. Has the shortened holiday season had much of an impact on your search business in North America? And then Sundar, as you talk about automation, machine learning A.I., how much of advertiser search spend is now on auto bidding and how do you think smart bidding is effective is affecting spending, growth and pricing?

[00:48:26.07]
Thank you.

[00:48:28.00]
So on the holiday shopping season, there is really nothing to highlight there. What we find is there are seasonal puts and takes in any given periods early. Nothing to note. On. Know, I don't have specific numbers to hear, but a tad here. But, you know, effectively we do see significant traction in these areas and advertisers are leveraging the features we have. We are bringing it here beat smart bidding, model bidding. There's tremendous traction with our advertisers here.

[00:49:10.01]
Thank you. Thank you. And our next question comes from Kevin Rafie from Evercore. Your line is now open. Hi. Thanks for taking the question. This is primarily for Sundar as you think about the risk profile of some of your businesses like waymo, like barely in health care. How do you manage those risks which, you know, likely in a scenario where autonomous cars have some action or something like that? Having those in-house and perhaps brand damage that could do to Google versus what you could do if those were entirely separate enterprises.

[00:49:44.00]
I know they're all held on the beneath the ofbut umbrella, but just sort of big picture how you think about managing that risk over time. Thank you. Thanks, Kevin. You know, we are you know, as I spoke earlier in the remarks, you know, part of the reason we are making sure we are investing in the proper governance structures so that we don't try to scale asset management across these important areas. Some of these are, you know, have regulatory aspects to it.

[00:50:13.07]
We are for some of these bets as well. And rarely is a great example. We've we've brought in outside investors, people with expertise and and setting up proper boards, structures and governance for these. So I think those all help. And, you know, we'll continue to, you know, you know, evaluate these on a priority basis and bring that rigour and discipline. But I do think so. That gives us a more flexible framework, if you will, to both have the independence when we need, but where we can have common shared synergies like our a-I investments.

[00:50:52.01]
Bring that to bear as well. Thank you. And our next question comes from Mark Mahaney from RBC. Your line is now open. Hi, this has been on for Mark. Thanks for taking the question. Ruth, I just kind of want to double click on something you said before in terms of other bets. Kind of like a sharpening focus on, yes, the allocation there was that kind of. Is that kind of signaling, signaling more of the same or is that kind of potentially maybe prioritizing investments more towards like share buybacks and stuff like that as opposed to like base?

[00:51:34.08]
I'm trying to ask. Should we expect a greater Resh rationalization on the other Bets segment going forward or is it more of the same? Thanks a lot.

[00:51:42.02]
So as I was saying is that when we look at the other bets, an execution, we've talked over time about measuring them against specific metrics and milestones, operating business, technology, financial performance. And we and we look at that as we calibrate the pace of investment, the approach to investments. And we're continuing to do that. We're putting a sharper focus on this, as Sundar indicated, looking at where does it make sense to work with extra on capital as we did with Verilli as an example.

[00:52:21.00]
But the bigger point is we continue to invest for the long term. And when we look at our capital return approach, it's very consistent with what we've talked about previously. The primary use of capital continues to be to support long term growth in Google and in other bets. And then it's about strategic investments and on top of that, return of capital to shareholders. Thank you. And our next question comes from Ross Sandler from Barclays. Your line is now open.

[00:52:56.01]
Right. Two questions. The Google segment margin looked really strong in the fourth quarter. Think is the first time that mix shift actually helped you guys from a margin perspective. So can you just talk about how how much of that margin increase year on year was from the hardware business dropping off versus improving elsewhere? And then as you move forward, you mentioned that headcount is going to accelerate in 2020. Is this an investment year in your view, or just kind of more of the steady kind of increase?

[00:53:26.08]
And then second question on on YouTube, a lot of discussion here about direct response, impact and the opportunity there. What percent of AdWords AdWords advertisers are are buying surge only versus buying search and YouTube at this stage. And it looks like from your new disclosure that you do decelerate a little bit in fourth quarter and any color on was driving that relative to the full year 9 19 growth rate. Thank you.

[00:53:54.00]
Okay. So taking the first part of that, in terms of the the operating margin in the fourth quarter, there were a number of discrete items in the fourth quarter last year and 2013.

[00:54:04.00]
So that did result in a favorable Google offing here in year comparison for this year. And as you said, the other cost to sales does reflect lower expenses related to hardware in Q4 in particular versus last year. But I think the main point to leave you with is that we do intend to continue to invest aggressively to support growth in the areas that we already talked about quite a bit on this call and search and cloud in hardware and in YouTube. In terms of headcounts, you know, I tried to break it out in my closing comments that it starts with those areas putting headcount, but behind the areas where we're investing for the long term.

[00:54:48.08]
And then we have a couple of additional factors that that are somewhat in, you know, expected to boost the year on year growth rate. Know one is bringing some support in-house. That's OP X neutral and the other is the Fitbit acquisition. In terms of the third part of your question, I'm just trying to recall it. The the in terms of the mix, I'm not sure there's much to add there.

[00:55:27.03]
Thank you. And our final question comes from the line of Colin Sebastian from Baird. Your line is now open. Thank you. First this. Given this, the focus and new leadership team in commerce was one. If you could talk a little bit more about the the opportunities you see for innovation there at the transactional part of the funnel. And then as a quick follow up on the acceleration in GCP, beyond the size of the deals, were there particular product areas like Big Queria or something else worth worth calling out that might have been selected to drive that acceleration?

[00:56:00.02]
Thank you.

[00:56:01.00]
Great. On. On commerce, you know, I'm really excited to build Ready's here. I brings a lot of experience. And you mentioned the transactional part of Off the funnel and I think it's navia very brings a lot of experience given us prior work, but we definitely see opportunity to improve in in the overall user experience in terms of how we present our rissoles, the visual nature of it making that experience more delightful. And when people are interested in something, you know, how do you make it more seamless to complete the transaction and bringing in deep partnerships with merchants and retailers to making that happen?

[00:56:45.03]
So excited about the opportunity there. And you know, and that's where we are investing on GCP. You know, we did see, you know, it's been a lot to do with, you know, bringing to bear all the resources we have in engaging well on these deals and the execution that there has been. Great. And it's definitely we see strong traction in data and analytics. And so our strength there as a company is definitely contributing significantly as well as our overall leadership in I.

[00:57:24.05]
Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Allen West for any further remarks.

[00:57:31.06]
Thanks, everyone, for joining us today. We look forward to speaking with you again on our first quarter 2020 conference call. Thank you. And have a good evening. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may now disconnect.