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pww.comAlphabet Inc., Q4 2019 Earnings Call, Feb 03, 2020 - NasdaqGS:GOOGL

NasdaqGS:GOOGL

Ellen West [Vice President of Investor Relations] đź’¬

During the Alphabet Inc. Fourth Quarter 2019 Earnings Conference Call, Ellen West, Vice President of Investor Relations, made the following statements:

  1. Opening Remarks:

    • Thanked participants for attending the call.
    • Introduced the executives present: Sundar Pichai (CEO & Director) and Ruth Porat (President & Chief Investment Officer).

  2. Safe Harbor Statement:

    • Noted that some statements made during the call regarding business performance and operations, and expected levels of capital expenditures, may be considered forward-looking.
    • Emphasized that such statements involve risks and uncertainties that could cause actual results to differ materially.
    • Directed listeners to the risk factors discussed in the company’s most recent Form 10-K filed with the SEC for more information.

  3. Financial Measures:

    • Mentioned that both GAAP and non-GAAP financial measures would be presented during the call.
    • Informed listeners that a reconciliation of non-GAAP to GAAP measures was included in the day's earnings press release, which is available on the company’s Investor Relations website at abc.xyz/investor.

  4. Introduction of Sundar Pichai:

    • Turned the call over to Sundar Pichai, CEO & Director.

  5. Closing Remarks:

    • Thanked everyone for joining the call.

    • Announced the next conference call would be for the first quarter of 2020.

    • Ended the call by wishing participants a good evening.

Sundar Pichai [CEO & Director] đź’¬

Sundar Pichai, CEO & Director of Alphabet Inc., provided insights on several topics during the Q4 2019 Earnings Call:

Opening Remarks

  • Role and Responsibility: Sundar thanked Larry and Sergey for the mission and values they instilled in Google and expressed his privilege in leading both Alphabet and Google.
  • New Revenue Disclosures: He highlighted the addition of new revenue disclosures to provide greater transparency into the business.
  • Search and Other Google Properties: Noted strong growth with total revenues of $98 billion in 2019.
  • YouTube: Highlighted YouTube’s $15 billion in advertising revenues in 2019, growing at 36% compared with 2018. Also mentioned over 20 million music and premium paid subscribers and over 2 million YouTube TV paid subscribers.
  • Google Cloud: Ended 2019 at a more than $10 billion run rate, up 53% year-on-year, driven by significant growth in Google Cloud Platform (GCP).

Approach to Managing Alphabet and Other Bets

  • Long-Term View: Emphasized a long-term approach to investing in deep computer science and technology, citing trends like AI, ambient computing, and cloud adoption.
  • Health Care: Cited Google Cloud’s work with hospitals and healthcare providers, along with AI applications in health systems and disease diagnosis.
  • Other Bets: Mentioned Verily and Calico’s partnerships in health care, using AI and cloud technologies to improve clinical trials, research, and drug development.

Highlights of the Quarter

  • BERT: Highlighted the neural network-based technique for natural language processing, BERT, as the biggest advancement in search in the last 5 years, now impacting 10% of searches and rolled out in over 70 languages.
  • Maps: Celebrated the 15th anniversary of Google Maps and the addition of reliable directions for 630 million additional people in locations that were previously poorly mapped.
  • Google Assistant: Noted that the Assistant helps more than 500 million monthly users across 90 countries.
  • Shopping and Commerce: Highlighted strong leadership hires and the largest number of daily shoppers on google.com during the Black Friday and Cyber Monday holiday weekend.
  • YouTube: Mentioned the ability for people to buy products directly from YouTube’s home feed and search results, emphasizing the focus on keeping YouTube safe for users, creators, and advertisers.
  • Google Cloud: Noted significant growth, with the number of deals over $50 million more than doubling year-over-year, and highlighted successful implementations with Wayfair and Lowe’s.
  • Google Other Revenue: Announced that over $80 billion has been earned by developers around the world from Google Play, with over 2 billion active monthly users.

Focus Areas for 2020

  • Creating Helpful Products: Ensuring products like Search, Maps, and Assistant help people in their daily lives.
  • Providing Trusted Experiences: Improving users’ privacy and security and reducing harmful content.
  • Executing at Scale: Focusing on seamless products across surfaces and platforms, deeper partnerships, and better use of shared infrastructure.
  • Creating Sustainable Value: Optimizing computing resources and growing business opportunities in areas like YouTube, Cloud, Play, Hardware, and more.

Question and Answer Session

  • GCP Growth: Emphasized the aggressive investment in GCP, highlighting the focus on building go-to-market capabilities, executing the product roadmap, and extending the global footprint of infrastructure.
  • Cloud Differentiation: Explained the differentiation in the cloud market, focusing on Google’s technology partnership capabilities and industry-specific solutions powered by AI.
  • Payments and User Engagement on YouTube: Discussed the importance of removing friction in payments and enhancing user engagement through contextual relevance and better commerce experiences.
  • Cross-Product Synergies: Mentioned efforts to break down silos through cross-functional teams focusing on user journeys, shared infrastructure, and AI deployment.
  • Monetization Levels on YouTube: Noted significant room for improvement in monetization levels, particularly in direct response and commerce experiences.
  • Risk Management for Other Bets: Highlighted the importance of proper governance structures and bringing in outside investors for businesses like Waymo and Verily.

These remarks showcase Sundar Pichai’s vision for Alphabet and his focus on leveraging technology to drive growth and innovation across the company’s diverse portfolio.

Ruth M. Porat [President & Chief Investment Officer] đź’¬

Ruth M. Porat, President & Chief Investment Officer of Alphabet Inc., provided the following details during the Q4 2019 Earnings Call:

  1. Financial Overview:

    • Total Alphabet revenues in 2019 were $162 billion, up 18% year-over-year or 20% in constant currency.
    • Q4 2019 total revenues were $46.1 billion, up 17% year-over-year and 19% in constant currency.
    • Revenue growth was driven by ongoing strength in Search, YouTube, and Google Cloud, offset by a decline in Hardware revenues.

  2. Cost of Revenues:

    • Total cost of revenues, including Traffic Acquisition Costs (TAC), was $21 billion, up 17% year-over-year.
    • Other cost of revenues was $12.5 billion, up 19% year-over-year, primarily driven by Google-related expenses.
    • The biggest factors were costs associated with data centers and operations, including depreciation, and content acquisition costs, particularly for YouTube.

  3. Operating Expenses:

    • Operating expenses were $15.8 billion, with headcount growth being the largest driver of year-over-year growth for R&D and sales and marketing expenses.
    • Stock-based compensation totaled $2.6 billion.
    • Headcount was up 4,803 from the third quarter and up 20% over 2018, with the majority of new hires being engineers and product managers.
    • Significant headcount increases were in Google Cloud for both technical and sales roles, including the impact of the Looker acquisition.

  4. Operating Income and Margin:

    • Operating income was $9.3 billion, up 13% year-over-year, for an operating margin of 20%.

  5. Other Income and Expense:

    • Other income and expense was $1.4 billion, primarily reflecting an increase in the market value of certain publicly traded equities and a non-cash gain from the Verily transaction.

  6. Effective Tax Rate:

    • The effective tax rate was 0.3% for the fourth quarter and 13% for the full year.
    • The fourth quarter ETR reflects the impact of discrete items, including the resolution of multiyear audits.

  7. Net Income and Earnings Per Share:

    • Net income was $10.7 billion, and earnings per diluted share were $15.35.

  8. Cash, Capital Expenditures, and Operating Cash Flow:

    • Cash capital expenditures (CapEx) for the quarter were $6 billion.
    • Operating cash flow was $14.4 billion with free cash flow of $8.4 billion.
    • Cash and marketable securities at the end of the quarter were approximately $120 billion.

  9. Segment Financial Results:

    • Google segment revenues were $45.8 billion, up 17% year-over-year.
    • Google Search and other advertising revenues were $27.2 billion in the quarter, up 17% year-over-year.
    • YouTube advertising revenues were $4.7 billion, up 31% year-over-year.
    • Google Cloud revenues were $2.6 billion for the fourth quarter, up 53% year-over-year.
    • Other revenues (Google Play, Hardware, YouTube non-advertising services) were $5.3 billion, up 10% year-over-year.
    • Total traffic acquisition costs were $8.5 billion or 22% of total advertising revenues.

  10. Google Operating Income and Margin:

    • Google operating income was $11.5 billion, up 20% versus last year, with an operating margin of 25%.

  11. Capital Expenditures:

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

  12. Other Bets:

    • Revenues for the full year 2019 were $659 million, up 11% versus 2018.
    • Operating loss for Other Bets was $4.8 billion for the full year 2019 versus an operating loss of $3.4 billion in 2018.

  13. Outlook:

    • Based on the strength of the U.S. dollar, FX headwinds are expected again in the first quarter of 2020.
    • Ruth discussed the revenue and investment outlook for each of the newly disclosed components:
      • Search and other advertising: Ample opportunity going forward with new ad experiences and improved measurement.
      • YouTube advertising: Substantial, continuing opportunity in direct response and with brand advertisers.
      • Google Cloud: Enormous opportunity, with aggressive investment in go-to-market capabilities, product roadmap, and infrastructure.
      • Hardware: Focused on the long-term opportunity with ambient computing.
      • Other Bets: Sharpening focus on metrics and milestones against which capital allocation is determined.

  14. Head Count and CapEx Investments:

    • Alphabet headcount grew by 20% in 2019, reflecting investment in key areas such as Cloud.
    • Expectation for the growth rate of headcount to be slightly higher in 2020 due to investment in priority areas, moving certain vendor functions in-house, and the planned impact of the Fitbit acquisition.
    • Full-year equity refresh grants to employees will be made during the first quarter of 2020.
    • Intention to increase investment in technical infrastructure and office facilities in 2020.

  15. Capital Returns:

    • Repurchased $6.1 billion of shares in the fourth quarter, more than double the amount in the fourth quarter of 2018.
    • As of year-end, $21 billion remained in the repurchase program.

  16. Closing Comments:

    • Confidence in the opportunities across Alphabet and the ability to continue delivering at a steady pace.

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