Alphabet Inc. (NASDAQ:GOOG) Q1 2024 Earnings Call Transcript April 25, 2024

Alphabet Inc. beats earnings expectations. Reported EPS is $1.89, expectations were $1.51.

Operator: Welcome, everyone. Thank you for standing by for the Alphabet First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Jim Friedland: Thank you. Good afternoon, everyone, and welcome to Alphabet's first quarter 2024 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 Forms 10-K and 10-Q, including the risk factors. 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.

Sundar Pichai: Thank you, Jim, and hello, everyone. It was a great quarter led by a strong performance from Search, YouTube, and Cloud. Today, I want to share how we are thinking about the business and the opportunity more broadly. Of course, that's heavily focused on AI and Search. Then I'll take you through some highlights from the quarter in Cloud, YouTube, and beyond. Let's discuss our momentum and strategy. Taking a step back, it took Google more than 15 years to reach $100 billion in annual revenue. In just the last six years, we've gone from $100 billion to more than $300 billion in annual revenue. Of course, Search continues to power that, as you see in our Q1 results. But in addition, we expect YouTube overall and Cloud to exit 2024 at a combined annual run rate of over $100 billion.

This shows our track record of investing in and building successful new growing businesses. Now, let's look at how well we are positioned for the next wave of AI innovation and the opportunity ahead. There are six points to make. One, research leadership. Two, infrastructure leadership. Three, innovation and search. Four, our global product footprint. Five, velocity in execution. Six, monetization paths. First, our foundation of research leadership. We've been an AI -first company since 2016, pioneering many of the modern breakthroughs that power AI progress for us and for the industry. Last week, we further consolidated teams that built AI models under Google DeepMind. This will help simplify development and establish a single access point for our product teams as they build generative AI applications with these models.

The teams are making rapid progress, developing Gemini and other models. In February, we rolled out Gemini 1.5 Pro, which shows dramatic performance enhancements across a number of dimensions. It includes a breakthrough in long context understanding, achieving the longest context window of any large -scale foundation model yet. Combining this with Gemini's native multimodal understanding across audio, video, text code, and more, it's highly capable. We are already seeing developers and enterprise customers enthusiastically embrace Gemini 1.5 and use it for a wide range of things. Beyond Gemini, we have built other useful models, including our Gemma open models, as well as imagine visual models and others. Second, infrastructure leadership. We have the best infrastructure for the AI era.

Building world-leading infrastructure is in our DNA, starting in our earliest days when we had to design purpose-built hardware to power search. Our data centers are some of the most high-performing, secure, reliable, and efficient in the world. They've been purpose-built for training cutting-edge AI models and designed to achieve unprecedented improvements in efficiency. We have developed new AI models and algorithms that are more than 100 times more efficient than they were 18 months ago. Our custom TPUs, now in their fifth generation, are powering the next generation of ambitious AI projects. Gemini was trained on and is served using TPUs. We are committed to making the investments required to keep us at the leading edge in technical infrastructure.

You can see that from the increases in our capital expenditures. This will fuel growth in cloud, help us push the frontiers of AI models, and enable innovation across our services, especially in Search. AI innovations and Search are the third and perhaps the most important point I want to make. We have been through technology shifts before, to the web, to mobile, and even to voice technology. Each shift expanded what people can do with Search and led to new growth. We are seeing a similar shift happening now with generative AI. For nearly a year, we have been experimenting with SGE and Search labs across a wide range of queries. And now we are starting to bring AI overviews to the main Search results page. We are being measured in how we do this, focusing on areas where gen AI can improve the Search experience, while also prioritizing traffic to websites and merchants.

We have already served billions of queries with our generative AI features. It's enabling people to access new information, to ask questions in new ways, and to ask more complex questions. Most notably, based on our testing, we are encouraged that we are seeing an increase in Search usage among people who use the new AI overviews as well as increased user satisfaction with the results. And with Circle to Search, people can now circle what they see on their Android screens, ask a question about an image, or object in a video, and get an AI overview with lens. Fourth, our global product footprint beyond Search. We have six products with more than 2 billion monthly users, including 3 billion Android devices. 15 products have 0.5 billion users, and we operate across 100 -plus countries.

This gives us a lot of opportunities to bring helpful Gen AI features and multimodal capabilities to people everywhere and improve their experiences. We have brought many new AI features to Pixel, Photos, Chrome, Messages, and more. We are also pleased with the progress we are seeing with Gemini and Gemini Advanced through the Gemini app on Android and the Google app on iOS. Fifth, improved velocity and execution. We've been really focused on simplifying our structures to help us move faster. In addition to bringing together our model building teams under Google DeepMind, we recently unified our ML infrastructure and ML developer teams to enable faster decisions, smarter compute allocation, and a better customer experience. Earlier this year, we brought our Search teams together under one leader.

And last week, we took another step bringing together our platforms and devices teams. The new combined team will focus on delivering high quality products and experiences, bolstering the Android and Chrome ecosystems, and bringing our best innovations to partners faster. We also remain focused on long-term efforts to durably re-engineer our cost base. You can see the impact of this work reflected in our operating market. We continue to manage our headcount growth and align teams with our highest priority areas. This speeds up decision making, reduces layers, and enables us to invest in the right areas. Beyond our teams, we are very focused on our cost structures, procurement, and efficiency. And a number of technical breakthroughs are enhancing machine speed and efficiency, including the new family of Gemini models and a new generation of TPUs. For example, since introducing SGE about a year ago, machine costs associated with SGE responses have decreased 80% from when first introduced in labs driven by hardware, engineering, and technical breakthroughs.

We remain committed to all of this work. Finally, our monetization path. We have clear paths to AI monetization through ads and cloud, as well as subscriptions. Philip will talk more about new AI features that are helping advertisers, including bringing Gemini models into Performance Max. Our Cloud business continues to grow as we bring the best of Google AI to enterprise customers and organizations around the world. And Google One now has crossed 100 million paid subscribers. And in Q1, we introduced a new AI premium plan with Gemini Advanced. Okay, those are the six points. So now let me turn to quarterly highlights from Cloud and YouTube in a bit more detail. In Cloud, we have announced more than 1,000 new products and features over the past eight months.

At Google Cloud Next, more than 300 customers and partners spoke about their generative AI successes with Google Cloud, including global brands like Bayer, Cintas, Mercedes-Benz, Walmart, and many more. Our differentiation in Cloud begins with our AI Hypercomputer, which provides efficient and cost-effective infrastructure to train and serve models. Today, more than 60% of funded Gen AI startups and nearly 90% of Gen AI unicorns are Google Cloud customers. And customers like PayPal and Kakao Brain are choosing our infrastructure. We offer an industry-leading portfolio of NVIDIA GPUs along with our TPUs. This includes TPU v5p, which is now generally available, and NVIDIA's latest generation of Blackwell GPUs. We also announced Axion, our new Google design and ARM-based CPU.

In benchmark testing, it has performed up to 50% better than compatible x86-based systems. On top of our infrastructure, we offer more than 130 models, including our own models, open source models, and third-party models. We made Gemini 1.5 Pro available to customers, as well as Imagine 2.0 at Cloud Next. And we shared that more than one million developers are now using our generative AI across tools, including AI Studio and Vertex AI. We spoke about how customers like Bristol-Myers Squibb and Etsy can quickly and easily build agents and connect them to their existing systems. For example, Discover Financial has begun deploying Gen AI-driven tools to its nearly 10,000 call center agents to achieve faster resolution times for customers. Customers can also now ground their Gen AI with Google Search and their own data from their enterprise databases and applications.

In Workspace, we announced that organizations like Uber, Pepperdine University, and Penny Mac are using Gemini in Google Workspace, our AI-powered agent that's built right into Gmail, Docs, Sheets, and more. We also announced Google Vids, a new application to create stories in short video format. And we introduced Gemini for meetings and messaging and Gemini security for Workspace. Customers are choosing Workspace because they have deep trust in our powerful security and privacy features. Our Cloud business is now widely seen as the leader in cybersecurity. I saw this firsthand when I went to the Munich Security Conference in February. Cybersecurity analysts are using Gemini to help spot threats, summarize intelligence, and take action against attacks, helping companies like American Family Insurance aggregate and analyze security data in seconds instead of days.

Turning next to YouTube, which continues to grow and lead in streaming. We announced that on average, viewers are watching over 1 billion hours of YouTube content on TVs daily. AI experiments like Dream Screen will give anyone the ability to make AI-generated backgrounds for YouTube shots. And on subscriptions, which are increasingly important for YouTube, we announced that in Q1, YouTube surpassed 100 million music and premium subscribers globally, including trailers. And YouTube TV now has more than 8 million paid subscribers. Finally, in Other Bets, Waymo's fully autonomous service continues to grow ridership in San Francisco and Phoenix, with high customer satisfaction and we started offering paid rides in Los Angeles and testing rider-only trips in Austin.

Overall, it was a great quarter and there's more to come. iOS is in less than three weeks, followed by Brand cast and Google Marketing Live. I want to thank our employees around the world who are at the heart of this progress and who continue to focus on building innovative products, helpful services, and new opportunities for businesses and partners around the world. Thank you. Philip?

Philipp Schindler: Thanks, Sundar. And hi, everyone. Google Services revenue of $70 billion were up 14% year-on -year. Search and other revenues grew 14% year-on-year, led again by solid growth in the retail vertical, with particular strength from APAC-based retailers, which began in the second quarter of 2023. YouTube ads revenues were up 21% year-on-year, driven by growth in both direct response and brand. Network revenues declined 1% year-on-year. In subscriptions, platforms, and devices, year-on-year revenues increased 18%, driven again by strong growth in YouTube subscriptions. Let's now talk about a few highlights from the quarter from a product innovation and advertising performance perspective. First, it bears repeating that AI innovation across our ads ecosystem is core to every aspect of our product portfolio, from targeting, bidding, creative, measurement, and across campaign types.

We've talked about how solutions like smart bidding use AI to predict future ad conversions and their value in helping businesses stay agile and responsive to rapid shifts in demand, and how products like Broad Match leverage LLMs to match ads to relevant searches and help advertisers respond to what millions of people are searching for. This is foundational. As advances accelerate in our underlying AI models, our ability to help businesses find users at speed and scale and drive ROI just keeps getting better. We're especially excited about the doors Gen AI's opening for creative capabilities, helping deliver on the premise of getting the right ad to the right user in the right moment. Look at Performance Max. In February, we rolled Gemini into P-Max.

It's helping curate and generate text and image assets so businesses can meet P-Max asset requirements instantly. This is available to all US advertisers and starting to roll out internationally in English and early results are encouraging. Advertisers using P-Max asset generation are 63% more likely to publish a campaign with good or excellent ad strength. And those who improve their P-Max ad strength to excellent see 6% more conversions on average. We're also driving improved results for businesses opting into automatically created assets, which are supercharged with Gen AI. Those adopting ACA see an average 5% more conversions at a similar cost per conversion in Search and Performance Max campaigns. And then there's Demand Gen. Advertisers are loving its ability to engage new and existing customers and drive purchase consideration across our most immersive and visual touch points like YouTube, Shorts, Gmail, and Discover.

Hollywood Film and TV Studio Lionsgate partnered with Horizon Media to test what campaign type would deliver the most ticketing page views for its The Hunger Games, Ballad of Songbirds, and Snakes Film. Over a three week test, Demand Gen was significantly more efficient versus social benchmarks, with an 85% more efficient CPC and 96% more efficient cost per page view. Lionsgate has since rolled out Demand Gen for two new titles. We're also bringing new creative features to Demand Gen. Earlier this month, we announced new generative image tools to help advertisers create high quality assets in a few steps with a few simple prompts. This will be a win for up-leveling visual storytelling and testing creative concepts more efficiently. And then there's obviously Search generative experience, which Sundar talked about.

I'll add that innovation in the user experience on Search has historically opened up new opportunities for advertisers. We saw this when we successfully navigated from desktop to mobile. We're continuing to experiment with new ad formats, including search and shopping ads alongside search results in SGE. And we shared in March how folks are finding ads either above or below the SGE results helpful. We're excited to have a solid baseline to keep innovating on and confident in the role SGE, including ads, will play in delighting users and expanding opportunities to meet user needs. Which brings me to Search and our strong performance in the first quarter. In Q1, retail was again a top contributor. Our focus remains on driving profitability and growth for retailers, helping them optimize digital performance for both online and offline, as well as innovate across our shopping and merchant experiences.

Highlights include continued upsides for retailers, leading into agile budget and bidding strategies across Search, P-Max, or both. Take Home Goods retailer IKEA, who leaned into Google's store sales measurement to understand its total omnichannel revenue opportunity across Search. By measuring 2.3x more revenue and using value-based bidding solutions to bid to its omnichannel customers, IKEA drove a significant increase in Omni revenue in Q1 and is now scaling this strategy globally. We also expanded local inventory ads into 23 countries, helping drive shopper confidence and offline sales. Retailers can convert intent into action by showcasing in-store availability, pricing, pickup options, and more all in one ad format. Moving to YouTube.

Last quarter, I went deep into our strategy. It all starts with creation, which drives viewership, which leads to monetization. A few updates to build on Sundar's remarks. First, creation, which is all about giving creators the tools to create amazing content, grow their audiences, and build their businesses. In 2023, more people created content on YouTube than ever before, and the number of channels uploading shorts year-on-year grew 50%. We also hit a new milestone with 3 million plus channels in our YouTube Partner Program. We recently shared that YPP has paid out more than any other creator monetization platform, including over 70 billion to creators, artists, and media companies over the last three years. From a viewer's perspective, watch time across YouTube continues to grow, with strength in both shorts and CTV.

According to Nielsen, YouTube has been the leader in U.S. streaming watch time for the last 12 plus months. In the first quarter, living room benefited from a combination of strong watch time growth, innovation in the user and advertiser experience, and a shift in brand advertising budgets from linear TV to YouTube. Viewers are watching YouTube because they expect to access everything in one place across screens and formats, their favorite creators, live sports, breaking news, educational content, movies, music, and more. And advertisers continue to lean in to find audiences they can't find elsewhere. Which brings me to monetization. We're pleased with our Q1 performance across both our ad-supported and subscription offerings. Sundar covered subscription growth.

On the ads front, direct and brand were both strong this quarter. Shorts monetization continued to improve, with shorts ads now supported on mobile, tablet, living room, and desktop, and available to both performance and brand advertisers. In the U.S., the monetization rate of shorts relative to in-stream viewing has more than doubled in the past 12 months, including a 10-point sequential improvement in the first quarter alone. Just last week, we introduced new ways for brands to get the most out of their shorts ads with new lineups on YouTube Select, including sports, beauty, fashion and lifestyle, and entertainment. For YouTube advertisers, increasing brand lift is one of the core goals. In Q1, we saw strong traction from the introduction of a Pause Ads pilot on connected TVs, a new non-interruptive ad format that appears when users pause their organic content.

Initial results show that Pause Ads are driving strong brand lift results and are commanding premium pricing from advertisers. Before I wrap, two quick highlights on how we're helping our partners transform and accelerate impact with the best across Google. Number one, to help McDonald's build the restaurant of the future, we're deepening our partnership across Cloud and Ads. Part of this includes them connecting Google Cloud's latest hardware and data technologies across restaurants globally and starting to apply Gen AI to enhance its customer and employee experiences. Number two, WPP. At Google Cloud Next, we announced a new collaboration that will redefine marketing through the integration of our Gemini models with WPP Open. WPP's AI-powered marketing operating system already used by more than 35,000 of its people and adopted by key clients, including the Coca -Cola company, L 'Oreal, and Nestle.

We're just getting started here and excited about the innovation this partnership will unlock. With that, a huge thank you to our customers and partners, many of whom we're excited to see at Google Marketing Live and Brand cast in just a few weeks. And a huge thank you, as always, to our incredible teams for their agility and hard work this quarter. Ruth, you're up.

Ruth Porat: Thank you, Philip. We are very pleased with our financial results for the first quarter, driven in particular by strength in Search and Cloud, as well as the ongoing efforts to durably re-engineer our cost base. My comments will be on year-over-year comparisons for the first 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 first quarter, our consolidated revenues were $80.5 billion, up 15%, or up 16% in constant currency. Search remained the largest contributor to revenue growth. In terms of total expenses, the year-on-year comparisons reflect the impact of the restructuring charges we took in the first quarter of 2023 of $2.6 billion, as well as the $716 million in employee severance and related charges in the first quarter of 2024.

As you can see in our earnings release, these charges were allocated across the expense lines and other cost of revenues and OpEx based on associated headcount. To help with year-on-year comparisons, we included a table in our earnings release to adjust other cost of revenues, operating expenses, operating income, and operating margin to exclude the impact of severance and related office space charges in the first quarter of 2023 versus 2024. In terms of expenses, total cost of revenues was $33.7 billion, up 10%. Other cost of revenues was $20.8 billion, up 10% on a reported basis, with the increase driven primarily by content acquisition costs associated with YouTube, given the very strong revenue growth in both subscription offerings and ad-supported content.

On an adjusted basis, other cost of revenues was up 13% year-on-year. Operating expenses were $21.4 billion, down 2% on a reported basis, primarily reflecting expense decreases in sales and marketing and G&A, offset by an increase in R&D. The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters. On an adjusted basis, operating expenses were up 5%, reflecting first in R&D an increase in compensation expense primarily for Google DeepMind and Cloud, and second in sales and marketing a slight increase year-on-year, reflecting increases in compensation expense primarily for Cloud sales. Operating income was $25.5 billion, up 46% on a reported basis, and our operating margin was 32%. On an adjusted basis, operating income was up 31%, and our operating margin was 33%.

Net income was $23.7 billion, and EPS was $1.89. We delivered free cash flow of $16.8 billion in the first quarter and $69.1 billion for the trailing 12 months. We ended the quarter with $108 billion in cash and marketable securities. Turning to segment results, within Google services, revenues were $70.4 billion, up 14%. Google Search and other advertising revenues of $46.2 billion in the quarter were up 14%. Let again by growth in retail. YouTube advertising revenues of $8.1 billion were up 21%, driven by both direct response and brand advertising. Network advertising revenues of $7.4 billion were down 1%. Subscriptions, platforms, and devices revenues were $8.7 billion, up 18%, primarily reflecting growth in YouTube subscription revenues.

TAC was $12.9 billion, up 10%. Google services operating income was $27.9 billion, up 28%, and the operating margin was 40%. Turning to the Google Cloud segment, revenues were $9.6 billion for the quarter, up 28%, reflecting significant growth in GCP with an increasing contribution from AI and strong Google workspace growth, primarily driven by increases in average revenue per seat. Google Cloud delivered operating income of $900 million and an operating margin of 9%. As to our Other Bets for the first quarter, revenues were $495 million, benefiting from a milestone payment in one of the Other Bets. The operating loss was $1 billion. Turning to our outlook for the business, with respect to Google Services, first within advertising, we are very pleased with the momentum of our ads businesses.

Search had broad-based strength across verticals. In YouTube, we had acceleration and revenue growth driven by brand and direct response. Looking ahead, two points to call out. First, results in our advertising business in Q1 continued to reflect strength and spend from APAC-based retailers, a trend that began in the second quarter of 2023 and continued through Q1, which means we will begin lapping that impact in the second quarter. Second, the YouTube acceleration in revenue growth in Q1 reflects, in part, lapping the negative year-on-year growth we experienced in the first quarter of 2023. Turning to subscriptions, platforms, and devices, we continue to deliver significant growth in our subscriptions business, which drives the majority of revenue growth in this line.

The sequential quarterly decline in year-on-year revenue growth for the line in Q1 versus Q4 reflects, in part, the fact that we had only one week of Sunday ticket subscription revenue in Q1 versus 14 weeks in Q4. Looking forward, we will anniversary last year's price increase in YouTube TV starting in May. With regard to platforms, we are pleased with the performance and play driven by an increase in buyers. With respect to Google Cloud, performance in Q1 reflects strong demand for our GCP infrastructure and solutions, as well as the contribution from our workspace productivity tools. The growth we are seeing across Cloud is underpinned by the benefit AI provides for our customers. We continue to invest aggressively while remaining focused on profitable growth.

As we look ahead, two points that will affect sequential year-on-year revenue growth comparisons across Alphabet. First, Q1 results reflect the benefit of leap year, which contributed slightly more than one point to our revenue growth rate at the consolidated level in the first quarter. Second, at current spot rates, we expect a larger headwind from foreign exchange in Q2 versus Q1. Turning to margins, our efforts to durably re-engineer our cost base are reflected in a 400 basis point expansion of our Alphabet operating margin year-on-year, excluding the impact of restructuring and severance charges in both periods. You can also see the impact in the quarter-on-quarter decline in headcount in Q1, which reflects both actions we have taken over the past few months and a much slower pace of hiring.

As we have discussed previously, we are continuing to invest in top engineering and technical talent, particularly in Cloud, Google DeepMind, and technical infrastructure. Looking ahead, we remain focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure. We believe these efforts will enable us to deliver full-year 2024 Alphabet operating margin expansion relative to 2023. With respect to CapEx, our reported CapEx in the first quarter was $12 billion, once again driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers.

The significant year-on-year growth in CapEx in recent quarters reflects our confidence in the opportunities offered by AI across our business. Looking ahead, we expect quarterly CapEx throughout the year to be roughly at or above the Q1 level, keeping in mind that the timing of cash payments can cause variability in quarterly reported CapEx. With regard to Other Bets, we similarly have work streams underway to enhance overall returns. Finally, as I trust you saw in the press release, we are very pleased to be adding a quarterly dividend of $0.20 per share to our capital return program, as well as a new $70 billion authorization and share repurchases. The core of our capital allocation framework remains the same, beginning with investing aggressively in our business, as you have heard us talk about today, given the extraordinary opportunities ahead.

We view the introduction of the dividend as further strengthening our overall capital return program. Thank you. Sundar, Phillip and I will now take your questions.

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