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pww.comAlphabet Inc., Q3 2018 Earnings Call, Oct 25, 2018 - NasdaqGS:GOOGL

NasdaqGS:GOOGL

Ellen West [Vice President of Investor Relations] 💬

During the Alphabet Third Quarter 2018 Earnings Call, Ellen West, Vice President of Investor Relations, made the following statements:

  1. Opening Remarks:

    • Welcomed everyone to the call.
    • Introduced Ruth Porat and Sundar Pichai.
    • Covered the safe harbor statement, emphasizing that some statements made during the call might be forward-looking and subject to risks and uncertainties.
    • Mentioned the availability of the earnings release and webcast on the Investor Relations website.

  2. Financial Measures:

    • Noted that both GAAP and non-GAAP financial measures would be presented during the call.
    • Informed listeners that a reconciliation of GAAP to non-GAAP measures was included in the earnings press release.

  3. Closing Remarks:

    • Thanked everyone for joining the call.

    • Mentioned looking forward to speaking with everyone again on the fourth quarter call.

Ruth M. Porat [President & Chief Investment Officer] 💬

Ruth M. Porat, President & Chief Investment Officer of Alphabet Inc., provided the following details during the Q3 2018 Earnings Call:

  1. Financial Overview:

    • Revenues for the third quarter were $33.7 billion, up 21% year-over-year and 22% in constant currency.
    • Revenue growth benefited from ongoing strength in mobile search, contributions from YouTube, Cloud, and desktop search.

  2. Geographic Performance:

    • U.S. revenues were $15.5 billion, up 20% year-over-year.
    • EMEA (Europe, Middle East, Africa) revenues were $11 billion, up 20% year-over-year, and up 19% in constant currency.
    • APAC (Asia Pacific) revenues were $5.4 billion, up 29% versus last year and up 30% in constant currency.
    • Other Americas revenues were $1.8 billion, up 19% year-over-year and up 28% in constant currency.

  3. Cost of Revenues:

    • Total cost of revenues was $14.3 billion, up 28% year-on-year, driven by Google-related expenses, particularly costs associated with data centers and content acquisition costs for YouTube.

  4. Operating Expenses:

    • Operating expenses were $11.1 billion, up 26% year-over-year, with the biggest increase in R&D expenses due to investment in technical talent and sales and marketing expenses, particularly for Cloud and Ads.

  5. Headcount:

    • Headcount at the end of the quarter was 94,372, up 5,314 from the previous quarter. The majority of new hires were engineers and product managers, with significant increases in Cloud for technical and sales roles.

  6. Operating Income and Margin:

    • Operating income was $8.3 billion, up 7% versus the previous year, with an operating margin of 25%.

  7. Other Income and Expense:

    • Other income and expense was $1.8 billion, including $1.4 billion of gains in equity security investments.

  8. Tax Rate and Net Income:

    • The effective tax rate was 8.8% for the third quarter, reflecting discrete items related to the U.S. Tax Act. Net income was $9.2 billion, and earnings per diluted share were $13.06.

  9. Capital Expenditures and Cash Flow:

    • Cash capital expenditures for the quarter were $5.3 billion, and operating cash flow was $13.2 billion with free cash flow of $7.9 billion.

  10. Google Segment Results:

    • Google revenues were $33.6 billion, up 21% year-over-year.
    • Google sites revenues were $24.1 billion, up 22% year-over-year, led by mobile search, YouTube, and desktop search.
    • Network revenues were $4.9 billion, up 13% year-on-year.
    • Other revenues for Google were $4.6 billion, up 29% year-over-year, fueled by Cloud and Play.
    • Total traffic acquisition costs were $6.6 billion, or 23% of total advertising revenues, up 20% year-over-year.
    • Operating income for Google was $9.5 billion, up 11% versus the previous year, with an operating margin of 28.2%.

  11. Other Bets Segment Results:

    • Revenues were $146 million, primarily generated by Fiber and Verily.
    • Operating loss was $727 million.
    • Other Bets accrued capital expenditures were $55 million.

  12. Outlook:

    • Revenues continue to benefit from the underlying momentum in advertising businesses, with the application of machine learning to improve user and advertiser experiences.
    • Hardware was only a modest contributor in the third quarter due to the launch of a new Made by Google family of products for the holiday season.
    • The sites traffic acquisition cost rate is expected to continue to increase year-over-year, reflecting ongoing strength in mobile search.
    • Seasonal impacts on other cost of sales from hardware sales and increased content acquisition costs for YouTube are expected in the fourth quarter.
    • Sales and marketing expenses are expected to be elevated in the fourth quarter to support the holiday season.
    • Investments in technical infrastructure, including data center construction and compute capacity expansion, are ongoing to support business opportunities.

  13. Waymo and Verily Updates:

    • Waymo expanded its Early Rider Program and began testing pricing models.
    • Verily continues to execute partnerships with pharmaceutical companies, including a joint venture with ResMed to focus on sleep disorders and a research collaboration with Gilead.

  14. Investment Activities:

    • The investment teams, GV and CapitalG, within Other Bets, realized approximately $400 million in gains from equity securities in the quarter.

Sundar Pichai [Chief Executive Officer] 💬

Sundar Pichai, the Chief Executive Officer, discussed several topics during the earnings call:

Introduction

  • Celebrated Google's 20th birthday and the 10th birthday of Chrome.
  • Highlighted the launch of the new Made by Google hardware lineup, including the Pixel 3, Google Home Hub, and Pixel Slate.
  • Emphasized advancements in AI and machine learning.

Hardware Highlights

  • Pixel 3: Uses AI to create a best-in-class camera, including features like Top Shot and Night Sight.
  • Google Home Hub: First smart speaker with a screen, offering assistance in various daily tasks.
  • Pixel Slate: Chrome OS reimagined as a tablet with access to Play Store apps.
  • Hardware Momentum: Daily active users of Google Home devices have grown by over 5x in the last year.
  • HTC and Nest: Talented employees joined the hardware team, contributing to the growth.

Core Products and Platforms

  • Search Updates: Announced significant updates, including an AI-powered ranking approach, the redesigned Google Feed (now called Discover), and a new search experience for Google Images.
  • Job Listings: Helping connect over 100 million people in 92 countries to relevant job listings.
  • Google Assistant: Expanded to 20 languages and 76 countries, with the ability to understand and speak multiple languages simultaneously.
  • Project Stream: An exciting test with Ubisoft to stream the game Assassin's Creed Odyssey, showcasing the potential for streaming graphically rich content.

AI Contributions

  • Flood Prediction: Using AI to better predict floods, initially in India, with plans to expand.
  • Breast Cancer Diagnosis: Applied deep learning models to improve the accuracy of diagnosis, demonstrating the effectiveness of AI in healthcare.

Video and Advertising Platforms

  • YouTube Learning Initiative: Announced a $20 million investment to expand educational content.
  • TrueView Actions Format: Expanding to enable users to take direct actions from video ads, such as signing up for newsletters or booking trips.
  • Subscription Experiences: YouTube Premium, YouTube TV, and YouTube Music premium continue to expand globally.
  • News Experience: Prioritizing the surfacing of credible news sources on the platform.

Advertising Platforms

  • Responsive Search Ads and Universal App Campaigns: Leveraging machine learning to create more effective ads.
  • Smart Shopping Campaigns: Using signals like seasonality and price to optimize ad placements.
  • Shopping Actions Program: Partnerships with brands like Nike, Best Buy, and Sephora to provide a seamless shopping experience.

Cloud Business

  • Titan Security Key: Features Google-designed firmware to enhance security.
  • Cloud AutoML Portfolio: Includes vision, natural language, and translation capabilities.
  • Customer Adoption: Examples include Metro using Google Cloud Platform for data-driven insights and the National Institutes of Health accessing Cloud services for biomedical research.

G Suite Business

  • Google Drive and Gmail: Reached 1 billion and 1.5 billion monthly active users, respectively.
  • Fast Retailing: Japanese retailer UNIQLO migrating to G Suite and exploring AI solutions on Google Cloud Platform.

Asia and U.S. Investments

  • Asia Revenue Growth: Remains strong, reflecting focused efforts to build great experiences for the region's users.
  • Tez (Google Pay): Over 30 million users and businesses in India using the app monthly, with over 1 billion transactions.
  • U.S. Investments: More than 80% of Alphabet's total capital expenditures were within the U.S., supporting thousands of jobs and local businesses.
  • Employee Growth: Added over 9,000 new employees in the U.S. and growing faster outside the Bay Area.

Closing Remarks

  • Acknowledged the incredible opportunities ahead and thanked Googlers worldwide for their contributions.