Alphabet 2016 Q4 Earnings Call
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Alphabet 2016 Q4 Earnings Call


Operator: Good day,
ladies and gentlemen, and welcome to the Alphabet Fourth Quarter
2016 Earnings Conference Call. At this time, participants are
in a listen-only mode. Later, we will conduct
a question-and-answer session, and instructions will follow
at that time. If anyone wishes to require
operator assistance, please press star then zero
on your touch tone telephone. As a reminder, today’s conference call
is being recorded. I would now like to turn the
conference over to Ellen West, Head of Investor Relations. Please go ahead. West: Thank you. Good afternoon, everyone,
and welcome to Alphabet’s Fourth Quarter 2016
Earnings Conference Call. With us today are Ruth Porat
and Sundar Pichai. While you’ve been waiting
for the call to start, you’ve been listening
to Ingrid Michaelson. In just a decade,
she has released six albums, five of which have charted. The song you just heard,
“Celebrate,” is from her latest release, titled
“It Doesn’t Have to Make Sense.” Please check out
her YouTube channel. Now I’ll quickly cover
the safe harbor. Some of the statements
that we make today may be considered
forward-looking, including statements regarding
our future investments, our long-term growth
and innovation, and the expected performance
of our businesses and our expected level
of capital expenditures. These 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 Form 10-K
for 2015 filed with the SEC. Any forward-looking statements
that we make are based on assumptions
as of today, and we undertake no obligation
to update them. During this call, we will present both GAAP
and non-GAAP financial measures. A reconciliation
of GAAP to non-GAAP measures is included in today’s
earnings press release. As you know, we distribute
our earnings release through our
Investor Relations website located at abc.xyz/investor. This call is also being webcast
from our IR website, where a replay of the call
will be available later today. And now I’ll turn the call
over to Ruth. Porat: Thank you. Our revenue of $26.1 billion
in the fourth quarter underscores the continued
excellent performance of our businesses globally. For the fourth quarter, our consolidated revenue
grew 24% in constant currency versus 4Q ’15, notwithstanding a challenging
year-on-year comparison. Advertising revenue growth
was driven by Mobile Search with ongoing strength
in YouTube and programmatic. We also had substantial growth
in other revenues from Hardware, Play, and Cloud. Our outline for today’s call is, first,
I’ll review the quarter on a consolidated basis
for Alphabet. Given the obvious seasonality
in Q4, I’ll focus on year-over-year
changes in our results. You can find
quarterly comparisons in the earnings release. Second, I’ll review
the results for Google and then Other Bets. Finally, I will conclude with a summary
of the full year results and our outlook. Sundar will then review our business and product
highlights for the quarter, after which
we will take questions. Let me start with
a summary of Alphabet’s consolidated financial
performance for the quarter. Total revenue was $26.1 billion,
up 22% year-over-year. We realized a negative
currency impact on our revenues year-over-year
of $202 million, or $15 million after the benefit
of our hedging program. Holding currency constant
to the prior period, our total revenue grew
24% year-over-year. Alphabet revenues by geography
highlight the strength of our business
around the globe. U.S. revenue was
up 24% year-over-year to $12.7 billion. U.K. revenue was
up 7% year-over-year to $2.1 billion, reflecting the continued
weakness of the British Pound relative to last year. In fixed FX terms, the U.K. grew 21%
year-over-year. Rest of world revenue
was up 24% versus last year to $11.3 billion. In fixed FX terms, revenues were up 26%
year-over-year. GAAP other cost of revenues
was $5.8 billion, up 41% year-over-year. Non-GAAP other cost of revenues
of $5.5 billion, up 41% year-over-year, primarily driven
by Google-related expenses, specifically costs associated
with operating our data centers, including depreciation, and content acquisition costs,
primarily for YouTube, as well as Hardware. The impact of our Q4
Hardware launches is reflected in both revenues
and cost of revenues. However, it’s important to note that cost of revenues
was also affected by approximately $320 million
of one-time charges related to equipment
and other adjustments which were unrelated
to Hardware. GAAP operating expenses were
$8.8 billion in the quarter, up 13% year-over-year. Non-GAAP operating expenses
were $7.3 billion, up 10% year-over-year. Year-on-year comparisons,
in part, reflect the impact of the expenses
from project milestones in Other Bets in 4Q ’15
that we discussed last year. On a GAAP basis, operating income
was $6.6 billion, up 23% versus last year. The operating margin was 25%. Non-GAAP operating income
was $8.5 billion, up 24% versus last year. The operating margin was 33%. Stock-based compensation
totaled $1.8 billion, up 29% year-over-year. Headcount at the end
of the quarter was just over 72,000, up 2,100 people
from last quarter. Consistent with prior quarters, the vast majority of new hires were engineers
and product managers to support growth
in priority areas, such as Cloud, including the addition
of employees from our Apigee acquisition. Other income and expense
was $218 million. We provide more detail
on the line items within OI&E
in our earnings press release. Our effective tax rate
was 22% for the fourth quarter, reflecting the geographic
mix of earnings in certain discrete items
affecting our U.S. rate. Our effective tax rate
for the full year 2016 was 19%. Net income was $5.3 billion
on a GAAP basis and $6.6 billion
on a non-GAAP basis. Earnings per diluted share
were $7.56 on a GAAP basis and $9.36 on a non-GAAP basis. Turning now to capex
and operating cash flow. Cash capex for the quarter
was $3.1 billion. Operating cash flow
was $9.4 billion with free cash flow
of $6.3 billion. We ended the quarter with cash
and marketable securities of $86.3 billion, of which approximately
$52 billion, or 61%, is held overseas. Let me now turn to
our segment financial results, starting with
the Google segment. Revenue was $25.8 billion,
up 22% year-over-year, which includes the impact of FX. In terms of the revenue detail, Google Sites revenue
was $18 billion in the quarter, up 20% year-over-year. Year-on-year growth reflects
strength in Mobile Search. YouTube revenue
continues to grow at a very significant rate, driven primarily
by video advertising across TrueView, including buying
on DoubleClick Bid Manager. Network revenue
was $4.4 billion, up 7% year-on-year, reflecting
the ongoing strong growth of programmatic and AdMob, offset by the traditional
network businesses. Other revenue for Google
was $3.4 billion, up 62% year-over-year, with strong performance from each of Hardware,
Play, and Cloud. Finally, we continue to provide
monetization metrics to give you a sense
of the price and volume dynamics of our advertising businesses. You can find the details
in our earnings press release. Let me remind you
that these metrics are affected
by currency movements. Total traffic acquisition costs
were $4.8 billion, or 22% of total
advertising revenue, and up 20% year-over-year. The increase in both Sites TAC as a percentage
of Sites revenue as well as Network TAC as a percentage
of Network revenue reflects the fact
that our strongest growth areas, namely Mobile Search
and programmatic, carry higher TAC. Total TAC as a percentage
of total advertising revenues was up as a result
of an increase in the Sites TAC rate
driven by the shift to mobile, which was partially offset by a favorable
revenue mix shift from Network to Sites,
which carries lower TAC. Operating income excluding SBC
was $9.5 billion, up 19% versus last year, for an operating margin of 37%. Google’s stock-based
compensation totaled $1.7 billion
for the quarter, up 29% year-over-year. Operating income reflecting
the impact of SBC was $7.9 billion,
up 17% versus last year, and the operating margin
was 31%. Accrued capex for the quarter
was $2.9 billion, reflecting investments
in production equipment, facilities,
and data center construction. Turning to Other Bets. I’ll cover results
for the full year 2016, because it’s most instructive
to look at financials for Other Bets
over a longer time horizon, as discussed previously. Results for the quarter
are in our earnings release. For the full year 2016, Other Bets revenue
was $809 million, up 82% versus 2015, primarily generated
by Nest, Fiber, and Verily. Operating loss excluding SBC was $2.9 billion
for the full year 2016, a slight decline from 2015. Including the impact of SBC, the operating loss
was $3.6 billion for the full year, an increase of 4% over 2015. Other Bets accrued capex was $1.4 billion
for the full year 2016, up 63% over 2015. Before I move to my conclusion, I’ll quickly cover
some specific changes to our past practices. First, we are making changes
to our non-GAAP reporting. SBC has always been
an important part of how we reward our employees in a way that aligns
their interests with those of all shareholders. Although it’s not
a cash expense, we consider it to be a real cost
of running our business, because SBC is critical
to our ability to attract and retain
the best talent in the world. Starting with our first quarter
results for 2017, we will no longer
regularly exclude stock-based compensation expense
from non-GAAP results. Non-cash stock-based
compensation will continue to be reported
on our cash flow statement, but we will no longer
be providing a reconciliation from GAAP to non-GAAP measures that reflects SBC
and related tax benefits. Second, we are shifting
the timing of our annual equity
refresh cycle for employees to the first quarter
of every year. The next full-year
equity refresh will occur in the first quarter of 2018. Because the last full employee
equity refresh occurred in the third quarter of 2016, we are providing employees
with a one-time half grant in the first quarter of 2017. Overall, total SBC for 2017 will be roughly the same
as it would have been had we maintained
a Q3 refresh cycle; however, given the shift
in refresh timing, there will not be the historical
seasonal increase in SBC in Q3 and Q4. We do not plan any changes to our senior executive
equity refresh, which occurs every two years, with the next one planned
for 2018. Third, to hedge
our non-U.S. dollar earnings, we are moving
from using options-only to using primarily forwards. We believe they will be
a more effective way to hedge earnings. We intend to continue
to use options selectively. We continue to believe that
constant currency revenue growth provides the best insight
into underlying trends by isolating the impact of
currency movements on revenue. We will continue to provide
constant currency results for consolidated revenues as well as for revenues
by geography. This will give you a view
into the effects of currency movements
on our revenue. Turning now to our full year
2016 performance and outlook. 2016 was simply
a great year for us. Our extraordinarily
talented employees worked very hard
and successfully for our users around the globe. That commitment is reflected in the company’s
exceptional financial results. For the full year 2016,
consolidated revenue grew 20%, and excluding the impact
of currency movements, grew 24%. GAAP operating income
was up 23%. This performance is a testament
to the ongoing innovation that is driving our success in Mobile Search, YouTube,
and programmatic advertising, each of which, we believe, has only begun
to scratch the surface. We remain excited
about the sizeable opportunities that have not yet been tapped. Alongside these businesses, we are focused on growing
additional revenue streams within Google
over the medium and long term. In 2016, our other revenue line
grew 41% on a full-year basis, reflecting the growth in our Play, Hardware,
and Cloud businesses. We see tremendous potential
ahead for these businesses as well as in
the continued development of non-advertising
revenue streams for YouTube. We’re investing in our Cloud
and Hardware businesses as well as our newer non-ad
revenue sources for YouTube in order to accelerate
their progress as major revenue drivers
for Google in the next several years. We’re also investing
significantly in the machine learning
capabilities and next-generation
computing infrastructure that will propel Google’s growth
over the longer term. For our Other Bets, we continue to calibrate the
magnitude and pace of investment appropriate to their
individual execution paths. A couple of our
recent announcements demonstrate our approach here. First, in December,
Waymo graduated into a standalone business
within Other Bets. We did this because Waymo
achieved agreed thresholds on the path to commercialization in its technical
and business model. Waymo continues
to excel at safety, has begun putting its new
Chrysler Pacifica Minivans on the road, and is continuing to drive down
hardware costs. Nest delivered
an outstanding performance this holiday season, with sales of key products
more than doubling over the two weeks including
Black Friday and Cyber Monday. And just this morning, Verily announced
that Temasek has agreed to invest $800 million for a minority stake
in the company. Temasek’s extensive experience with life sciences
and health care companies and deep understanding
of Asian markets make it a valuable
long-term partner for Verily. The internal transparency
we’ve provided to our business leaders
across the Other Bets and Google is helping us to allocate
resources more thoughtfully across the opportunities
that we see. We remain committed to managing for long-term revenue
and EPS growth, for dollars
rather than margin targets, while exercising
careful stewardship over the amount
and pace of investment. I will now turn the call over
to Sundar. Pichai: Thanks, Ruth. 2016 was a great year
for Google, and 2017 is shaping up
to be even more exciting. This quarter was about the
business firing on all cylinders and terrific progress across Google’s newer areas
of investment. Today I’m going to talk
about three things. First, the key trend
powering Google today, machine learning, and how it’s
improving our products and creating
lots of opportunities. In particular, how it’s
underpinning our core mission of providing access
to information for everyone, especially via
the Google Assistant, which is off to a great start. Second, I want to talk about
three of our biggest bets– YouTube, Cloud and Hardware– where we are making
great progress. And third,
I’ll discuss the great trends we are seeing
across our platforms: our vibrant computing platforms
Android, Chrome, and Daydream; strong momentum in Google Play; as well as our thriving
advertising platform. First, machine learning
and access to information. As I’ve shared before,
computing is moving from mobile-first to AI-first, with more universal, ambient,
and intelligent computing that you can
interact with naturally, all made smarter by the progress we are making
with machine learning. 2016 was the year
that this became central to who we are as a company
and the products that we build. We had more than 350 launches
powered by machine learning across areas like Search, Maps,
Messaging, and Google Play. You’ve heard lots
of these examples: easier email replies in Inbox,
better YouTube recommendations, the incredible cameras
on our Pixel phones, and smarter bidding
for advertisers in AdWords. A centerpiece
of our machine learning efforts is the Google Assistant, which allows users to have a
natural conversation with Google to help them get things done
across their experience. It’s off to a great start. You can easily ask it
to navigate home, tell you about your schedule
for the day, or even play trivia. We reached a milestone
last month with our announcement of
the Assistant developer platform called Actions on Google. It gives developers like Uber,
SongPop, and Headspace the opportunity to build
conversation actions for Google Home, and we’ll expand it
even further this year. The Assistant is baked into
our smart messaging app Allo, which we expanded this quarter in languages like Hindi,
Brazilian Portuguese, and Japanese. This quarter, using
Neural Machine Translation, we have improved our translation
ability more in one single leap than all our improvements over
the last ten years combined. We’ll be rolling
Neural Machine Translation out across the more
than 100 languages available in Google Translate
in 2017 and also for all
of our Cloud customers through the Google Cloud
Translation API. And Google Photos,
which, as you know, has machine learning
at its heart, continues to grow in popularity. Last quarter,
we launched PhotoScan, which helps you digitize
all of those old printed photos that are probably stored
in a shoebox in your closet, to keep them safe, organized,
and shareable. In February,
we are hosting a summit where our machine learning team
and other experts will discuss the future of the TensorFlow
open source initiative and share some
of their latest demos. Now I want to spend some time
talking about three big bets: YouTube, Cloud, and Hardware. First, YouTube, which remains
the premier destination for online video globally
and has seen tremendous growth. At the heart
of YouTube’s success is its booming community
of creators. Every single day,
over 1,000 creators reached a milestone of having
1,000 channel subscribers. We are focused on two main areas
of investment: first, creating
the best video experience that’s fast,
personalized, searchable, and that just works. We have rolled out many
new features to the platform, like 360-degree videos,
mobile live streams, and support for videos
in virtual reality. In regions
with limited connectivity, we introduced YouTube Go, which has transparency
and control of data usage. Second, we are focused
on delivering content that gives fans
exactly what they want through offerings
like YouTube Music, YouTube Kids, and YouTube Red. We have 27 originals, pairing some of the most popular
YouTube creators with the biggest directors
and producers in Hollywood. One of our new originals called “This is Everything:
Gigi Gorgeous,” about the courageous journey
of a transgender YouTube star, officially premiered at Sundance
just a few days ago. The popularity of this original
content has been successful in driving new subscribers
and retaining existing ones, and we’ll do more in 2017. Second, our Cloud business
is on a terrific upswing. In 2016 we made huge strides building out
our product offerings across all areas of
Google Cloud Platform, or GCP. We routinely hear from customers that we have now moved
well beyond table stakes, and we have truly
differentiated offerings in four key areas: data analytics
and machine learning, security and privacy, tools for
application development, and the ability to create
connected business platforms, leveraging our recent
acquisition of Apigee. Our product advancements
across all of GCP in addition
to our increased focus on how we work
with enterprise customers have enabled us
to accelerate growth with new Fortune 2000 customers while also inspiring
our current customers to substantially expand
their use of GCP. We’ve also enjoyed strong growth
with G Suite, our cloud-based collaboration
and productivity applications. G Suite achieved a significant new customer milestone
last quarter. More than 3 million
paying businesses are now using G Suite to collaborate smartly
and securely in the cloud. Our increased success
with enterprise customers relates to the unparalleled
security and data protection we can provide by offering
an entirely cloud-based solution that enables an extremely
strong level of protection. For both GCP and G Suite, expanding our partner ecosystem
continues to be a big focus, and last quarter the team
announced new alliances, including Intel, Improbable,
Slack, Pivotal, and Red Hat. Our customers and partners
are appreciating Google Cloud’s dramatically accelerated pace
of product rollout as well as our responsiveness to both their needs
and aspirations. We look forward to showcasing
customers, partners, and all of Google Cloud at our next annual
Next User Conference in March. Third, Hardware. We introduced a new family
of beautiful hardware devices in October
that are made by Google, led by Google Home
and our Pixel phone, which feature
the Google Assistant built in. We’re thrilled
with the reception as well as the really
happy customers we saw over the holiday season. In particular, Google Home
was a very popular present that many people opened
on Christmas morning. We are committed to this
for the long term as a great way to bring
a beautiful, seamless Google experience to people. The early signs are promising, and you can expect to see us expand our offerings
thoughtfully. We’ll also continue
working closely with our ecosystem partners to create the best experiences
for users. So those are three
of our biggest bets. We’re also continuing
to push the platforms that are powering our business
and our partners’ businesses: first, our computing platforms; and second,
our advertising platforms. Building powerful open platforms
has always been core to Google, and our platforms like
Android, Chrome, and Daydream are creating more innovation,
more choice for users, and more opportunities
for partners. This was on full display
at the CES show. There we saw partners
like Nvidia and AirTV introduce new media players
based on Android TV, and Casio and New Balance shared their latest
Android Wear smartwatches. We also worked closely
with Samsung on a new generation
of Chromebooks called the Samsung
Chromebook Pro and Plus, which are getting great buzz. And in VR, we recently
worked with partners like Huawei and ASUS and others to introduce even more
new Daydream-ready devices. CES is just a start, and there’s a lot more
coming from our great partners across these platforms in 2017, and we’ll continue
working hand in hand with them to provide the best experiences
for our users. We’re also investing in ways to help developers succeed
using our platforms. Last week, we announced that we are acquiring the Fabric
mobile app development platform. This will work alongside
our Firebase platform to help developers
build better apps and grow their businesses. Since we launched Firebase
at I/O, developers have created over
1 million Firebase projects. That’s incredible momentum. Google Play helps bring
our platforms to life on mobile and beyond, and it’s experiencing
great momentum. As a piece of trivia, do you know what 2016’s
top movie was on Google Play? I’ll provide the answer
in a second. Play had a great quarter with continued growth
in our top markets as well as in emerging markets, where user spend grew
by more than 70% year-over-year in countries like India, Mexico,
Turkey, and Saudi Arabia. As the content hub
across our growing platforms, the Play team is working hard to help users get the most
out of their devices through apps, games,
and premium content. In Q4, the Play Store
launched on Daydream, Android apps became available
on Chromebooks, and we announced
that the Play Store will soon be coming
to Android Wear. The platform is
also benefiting significantly from machine learning. We recently introduced a new
Google Play Music experience that makes music streaming
smarter and easier to use with better recommendations
and playlists. And the answer
to my trivia question: the top movie in 2016
was “Deadpool.” Lastly, I quickly touch
on the highlights across our growing
advertising businesses. I’m so pleased
with the terrific partnerships we have continued
to grow this year. We work incredibly closely
and deeply with agencies, marketers,
and publishers worldwide. These relationships owe a lot
to the hard work of our fantastic business teams
around the world. Our mobile properties, like Search, YouTube, Maps,
and Google Play, are where people turn
when they’re actively engaged. They are the prime time
in the mobile era. We had another successful
holiday season where we saw two clear trends. First, this was the year that mobile shopping
went truly mainstream, with shoppers using phones
as their door to the store, to locate nearby retailers,
find promotions, and comparison shop. We recently introduced
Promoted Places in Google Maps, helping advertisers stand out
with branded location icons, showing promotions
and live updates of popular times right when
someone’s looking for it. Gap, Inc. is one example
of a company that understands the importance
of connecting with consumers on mobile devices. In December, they increased their U.S. mobile search
ad spend with us, and as a result, they saw about four times
the mobile traffic to their U.S. e-commerce sites compared to December
of last year. Second, we saw this season
that measurement really matters, and advertisers want
reliable ways of understanding where sales and traffic
are coming from and how their campaigns
are working. We saw increased use of our
popular Store Visits technology over the holiday
shopping season, helping businesses understand how online ads bring customers
into their physical stores. In less than two years, Store Visits has helped
advertisers measure over 3 billion store visits
globally. Now turning to our thriving
video ads business led by YouTube. Marketers are seeing
terrific success here. Air France used YouTube’s
TrueView video ads in order to reach
valuable business travelers and new customers
around the world. By showing engaging videos highlighting the unique
experiences of Air France, they saw more
than 100 million views throughout the campaign. Turner Sports partnered
with YouTube and DoubleClick for NBA Opening Night to try a new way to reach fans
for the start of the season. We helped them deliver
real-time video ads with behind-the-scenes
pre-game footage uploaded immediately into
a YouTube TrueView ad campaign. Thanks to the campaign, they were able to reach
19 million more people across the Web
with 17% lift in ad recall. Speaking of DoubleClick,
many news publishers who are using our
Accelerated Mobile Pages are now plugging into our
Ad Exchange to drive revenue. We are thrilled
that most publishers are getting higher
click-through rates and effective CPMs
with their AMP pages. Before I end,
I want to highlight one area that I’m really proud of where Google
is truly leading the way. As you know, our data centers from Oklahoma to Chile
to Finland enable our services
to be blazing fast, and they are
what makes it possible for Google Photos
to offer unlimited storage. But to do all this,
they use lots of energy. In 2012, we set a long-term goal to reach 100% renewable energy
for our operations. In 2015, we procured
enough renewable energy to cover 44% of our total. And in 2016, we increased it
to more than 50%. I’m really proud that we’ll
reach 100% renewable energy for global operations in 2017. This is great
for the environment, and with renewable
energy costs declining, it’s a huge win
for our business results too. With that, I want to thank
the Googlers around the world who helped make this
another exciting quarter. Over to you, Ruth. Porat: Thank you, Sundar. And we will now
take your questions. Operator: Ladies and gentlemen
on the phone lines, if you would like to ask
a question at this time, please press star
and then the number one key on your touch tone telephone. If your question
has been answered or you wish to remove yourself
from the queue, you may press the pound key. Again, to ask a question,
please press star one. And our first question comes from Heather Bellini
of Goldman Sachs. Your line is now open. Bellini: Great, thank you. I had a question for Sundar. I was wondering, I wanted
to focus on the Cloud business. When we speak with CIOs
about GCP, they highlight, in many cases,
the need for Google to improve upon
its enterprise sales strategy. I’m just wondering
if you could share with us the changes you’ve been making
in that organization and the goals that you have
for the Cloud business for 2017. Pichai: Thanks, Heather. You know, as I said
in my opening remarks, I do think, you know, we are
seeing tremendous momentum with our partnerships team
and how we’re approaching. We have a lot of new alliances,
which I talked about. So now we have teams dedicated
to partnering with GSIs, and we have a team focused
on technology partnerships too. On the GSI front, we announced a new alliance
with Accenture last September to create industry solutions
for a number of industries, including retail. So for me, I think, overall,
you know, everywhere I look at, we are establishing
a world-class enterprise team. Partnerships has been
a big focus, and I have seen progress there. You know, I think, you know, as I said in my remarks,
overall, 2017 I expect to have
a lot of momentum, because we have moved
well beyond the table stakes. Now we are really,
you know, competing on areas which we think
we have differentiation. I talked about data analytics
and machine learning, security and so on. So, you know, I think
we are well positioned. The momentum when we look
at the numbers internally, and as well as the traction we see in competitive
situations, you know, I definitely think we’re
going to have a great year. And hopefully at the Next
conference coming up, Diane and team will share
a lot more details. Bellini: Thank you. Operator: Thank you. And our next question comes
from Eric Sheridan of UBS. Your line is now open. Sheridan: Thank you
for taking the questions. Maybe first for Sundar. Now that you have this breadth
of device ecosystem out there into the marketplace, wanted to know if we could get
a little bit more color about what your learnings
are about the adoption of the device ecosystem, how you’re thinking about
the go-to-market strategy over the medium to long term, and how we might see
sort of an evolution across operating systems. And then, if I can,
maybe one for Ruth. You called out
a one-time charge in– or one-time impact
on the number in the quarter. I want to know if we can get
a little more granularity about what went
into that one-time expense so we could just sort of
factor that in the financials. Thank you. Pichai: You know, Eric,
I’m assuming when you said
the device ecosystem, you’re talking about how our
platforms are working at scale. You know, the thing
which I get excited about is, you know, computing
is increasingly moving, rather than just one device, which is a dedicated
computing device, to being there for users
in their context. And you’ll see computing increasingly embedded
in many things. And we have
a comprehensive strategy. You know, we do want people– you know, we invest in it
for the long run. We are improving
our computing experiences with machine learning. We expect to be there for users
across a device ecosystem, and we’re also building things
like Google Play to work across all of this so that users can have
one coherent experience. I think, you know,
we see great momentum both across
our partner ecosystem as well as pushing the cutting
edge of the experience, which is what we strive to do
with our own Hardware devices. And so I think the end-to-end
strategy is working well for us. Porat: And in terms of,
you noted the one-time item, there are really two that
I’m actually going to call out. One was, in cost of revenues, I noted that equipment costs
were elevated by some one-time charges, and so there was
some pressure there. And then the other item
that I noted was with respect
to our tax rate. I noted that there was a slightly elevated tax rate
this quarter. It’s always affected by
the geographic mix of results, but we did have a discrete item
that affected the U.S. tax rate, just to make that clear. Operator: Thank you. And our next question comes
from Mark Mahaney of RBC. Your line is now open. Mahaney: Thanks,
two questions, please. Again, Ruth, on that
$320 million one-time charge, is there any more detail
you can provide on that? It seems like a relatively
sizable amount. And then, Sundar, if you could
talk a little bit about voice search, particularly in the home
and in the car, and the importance of getting
devices out in the marketplace. And the challenge
I’ll throw to you is, it looks to me like Google
devices are being outsold 10-to-1 or something like that
in a lot of homes. And, you know,
it’s immaterial now, but I could see in five years if there’s a new voice search
interaction interface and it’s not Google in the home, that could be a real challenge
for the company. Thank you. Porat: So on the first one, trying to be helpful
in giving you dimension and impact on cost of sales, but really not much more
to add there. I think the other point is, as you’re thinking
about the Hardware business, it was gross margin positive. There were just
some other variables in there. Pichai:
And, Mark, on voice search, we are really excited about it. You know, I think it’s
a very natural way for users to interact. We think it will be one mode. Users will have
many different ways by which they interact
with computing. And for voice, you know,
as you pointed out, we expect voice to work
across many different contexts. So we are thinking about it
across phones, homes, TVs, cars, and, you know, trying to drive
that ecosystem that way. And we want Google to be there
for users when they need it. And even with Google Home,
we just launched it in Q4. We had a very strong
quarter there. And, you know, we are going
to invest a lot in it over 2017. It’s very early days. You know, when I look at what it
would take to voice search well, our years of progress
we have done in areas like natural language
processing comes into play, and I think there is
a lot of work ahead to make all of this
work well for users. And, you know,
this is the core area where we have invested in
for the very long term, and so I feel very comfortable about how this will play out
in the future. Mahaney: Thank you. Operator: Thank you. And our next question comes from
Douglas Anmuth of JP Morgan. Your line is now open. Anmuth: Thanks for taking
the question. Ruth, you commented
on YouTube and addressed some of the
non-advertising revenue streams. I was just hoping you could
elaborate there a little bit what the goals would be there
for your users. And then just to follow-up on
Mark’s question on voice search. I understand, Sundar,
it’s early, but how do you think about the
challenges and opportunities from a monetization perspective
in voice? Thanks. Porat: So on the first question,
in terms of YouTube, Sundar elaborated
on my opening comments. We’re really pleased with the
ongoing strength we have there. As we’ve talked about
on prior calls, it’s largely driven by video,
primarily TrueView, with a strong contribution
from DoubleClick Bid Manager. And we are continuing to invest significantly
in the business, given the importance
of supporting the ecosystem of content creators
through partner payments, marketing, YouTube Originals,
YouTube Spaces. We’re broadening the platform. We’re investing
in the requisite infrastructure given machines
and bandwidth required. And Sundar elaborated on some
of the upside we see there on the non-ad side. And really the point
I was trying to stress, consistent with
Sundar’s comments, is, we’ve got
the non-ads momentum here on the YouTube side, and we’re also seeing
tremendous momentum with Cloud, which we’re excited about, and Hardware and investing
behind those. So those continue
to build out the revenue streams as we’re looking in the near
to medium to long term. Pichai: And, Doug,
just like Mark’s question on voice search, I would encourage you to think about
it from a user’s standpoint. They are looking
for information, looking to get things done. The voice queries are one part of the total journey
they are on. So when we think about something
like the Google Assistant, we think about this
as an ongoing conversation with our users
across different contexts. So they may ask a question
on voice. Later, when they pick up
their phone, they want continuity. So we think of this
as an end-to-end thing. And all of this means users
engage more with us, more with computing,
and look for more information. And I think the trends we see
are positive. So, you know, we think about it
from a long-term perspective. And so I see more opportunity
than challenge when I think about voice search. Anmuth: Great, thank you. Operator: Thank you. And our next question comes from Peter Stabler
of Wells Fargo Securities. Your line is now open. Stabler: Thanks very much. Another one on YouTube,
if I could. Would it be possible
to get any sort of metrics around YouTube Red and how the subscription
business has been progressing, realizing you’re not going to be
providing that every quarter but that you do
occasionally give us some sort of benchmarks
in the market? Thanks so much. Porat: Well, at this point, we’ve launched
in five countries. We’re pleased
with the early success. And, you know,
it’s still early days. It takes a while to build
a subscription business here. And I’ll pass it to Sundar
for additional commentary. Pichai: Look, I mean,
I think I would think about it as we’re investing a lot in developing
this premium experience. We have YouTube Red,
YouTube Music, and we do offer it across
Google Play Music as well. You will see us invest more. More countries,
more original content. And we’ll bring together
the experiences we have over the course of this year so it’s even more compelling
for users. But, you know,
we are seeing tractions with the rate of sign-ups. We’re not disclosing
specific numbers, but I’m excited
at the progress there. Stabler: Thank you. Operator: Thank you. And our next question comes from Brian Nowak
of Morgan Stanley. Your line is now open. Nowak:
Thanks for taking my questions. I have two. The first one,
just to go back to YouTube. I appreciate the color
around the content. I would be curious to hear about
how you think philosophically about partnering with
more premium content players to maybe drive
even higher engagement and even better
YouTube experience. And then the second one, if you kind of step back
in your mobile search business and the verticals, the innovation you’ve had
at retail and in travel with shopping and Hotel Finder, I guess I’d be curious to hear about where you see
the biggest potential for more improvements
in certain verticals for an even more relevant and
higher search result experience over the next years. Thanks. Pichai: On your first question,
you know, look, I mean, we think of YouTube, again,
as an ecosystem. We are trying to connect
creators with users, form a community. And so, you know, we work hard
to bring more premium content. You know, we already work
with TV networks and their individual shows, whether it’s the Late Night show like James Corden
or Jimmy Fallon, afternoon shows like Ellen, sports programming
like NBA and NFL. For example, sports is one of
the most popular verticals. We have hundreds of sports
partnerships in place. And so we’ll continue
to invest that way and drive
the premium content there. On the second one, you know, we do look
at the end-to-end experience, look at what
are the kinds of tasks which users are trying
to get done. Mobile raises the bar. You know, we want to provide those deeper experiences
for users. And so, you know, I generally
think local is a big area. We have strong assets there
with Maps. And so we think about how we can
improve the local experience a lot more for users. So, for example,
within local areas like dining, we work closely with our
partners to make that better. So we get it
at a pretty granular level, and we try to hit all the areas. And so I think you’ll see
progress in all these areas over the next few years. Nowak: Great, thanks. Operator: Thank you. And our next question comes from Anthony DiClemente
of Nomura. Your line is now open. DiClemente: Hi, thanks
for taking my questions. Yeah, just on YouTube,
I’d love to hear about pricing and then also about ad lift. So is there anything
you can highlight on ad format? And specifically we noticed that recently
you’re enabling marketers to target YouTube ads
based on Search. And so I just want
to hear about that strategy. And maybe relatedly,
the recently announced non-skippable YouTube
ad format, you know. Would love to kind of hear
about that. Thanks for taking my question. Pichai:
Look, overall I would say there’s been a–been
very pleased with how the team has been driving,
you know, innovation in ad formats
and the ad experiences. I think video advertising
is in its very early days. You know, we see whenever we– so we are in
an innovation phase, and the advertiser response
to all of these new formats has been really positive. So, for example, Bumper Ads, our six-second video format
that we launched, is already being used
by thousands of accounts, including major brands like
Universal Pictures and Netflix. On your question
around how we think about the experience
across screens, you know, it’s really important
to understand users, you know, consume YouTube
across screens, and so they experience
a consistent experience. And similarly, from an
advertising standpoint, we want that to be thoughtful
for users, more relevant
across screens as well. And so that’s the context
in which we do this. We give users control
over the ads experience. But I do think,
as part of these changes, advertisers, you know,
can get more detailed insights from their YouTube campaigns
across devices so they can better understand
the impact of their marketing campaigns. So I think it’s early days, but I think it’s
the right direction, and I think we will see
good traction from it. Operator: Thank you. And our next question comes from Michael Nathanson
of Moffett. Your line is now open. Nathanson: Thanks. I have two, one for Sundar
and one for Ruth. Sundar, speaking
on the YouTube questions, there was a report
that YouTube and CBS had agreed on an agreement
to distribute CBS on YouTube. Can you talk a bit
if that is actually happened? And if so, what do you see
the opportunity to partner with networks and how will that evolve
over time? Pichai: Look, you know,
I can’t comment on any specific discussions, but, you know,
I said a little bit earlier, you know, we are constantly
working with partners across these areas. You know, we work very closely
with TV networks on their individual shows. It’s a big part
of the YouTube experience. And so you’ll see us work hard to make these
partnerships deeper and bring more content
to our users. So maybe I’ll leave it at that. Nathanson: Okay,
and then for Ruth, you mentioned programmatic
drove the Network numbers, revenue growth this quarter. If you look at fourth quarter
this year and last year, there seems to be
an acceleration in Q4 and then it comes back. I wonder what’s happening
seasonally to that revenue line that drives fourth quarter
up so much? Porat: Well, as we’ve talked
about on prior calls, there are obviously
a number of businesses within the Network line, and a number of things
went right this quarter. I wouldn’t extrapolate from it. As you noted, there can be
some seasonality, and Q1 is typically lower
than the fourth quarter. I think the main point is that the programmatic
business continues to be a strong contributor
with significant growth, reflecting the ongoing
advertiser adoption just given the overall
efficiency of programmatic and improved targeting and the benefit
of inventory growth. And so the story
is pretty much unchanged. We continue to see
the growth in programmatic offset by declines in
the more traditional businesses. And, you know,
when you’re looking at the quarter-over-quarter, you’re continuing to see things like the impact
of policy changes and timing of product launches. But I just think that
there were a number of things that went well this quarter. Q3 was a bit lighter, so that then flattered the
quarter-over-quarter comparison, but I wouldn’t extrapolate
from this. Nathanson: Okay, thanks. Operator: Thank you. And our next question comes from Lloyd Walmsley
of Deutsche Bank. Your line is now open. Walmsley: Thanks. I’m wondering, Sundar,
if you can just give us a sense on the Pixel phone
hardware opportunity to kind of build
direct mobile distribution and capture hardware margin and how you think about that
versus the potential disruption, you know, having your own
handset at a bigger scale could cause
in the Android ecosystem. You know, do you think
this is something that could get
meaningful market share without disrupting
the ecosystem? And then, you know,
a second follow-up related to this would be
on the Pixel phones. You know, with Google Assistant having been built uniquely
into the core of the experience, is there anything
you’re learning as the usage of that increases? Is it driving
a step-function increase in engagement with the
hardware-software integration? Thanks. Pichai: Look, I mean,
we are in early days. I think it’s really important
when you work on a platform, you know, you have
to drive it forward. So we’ve always done
by putting out, you know, the state of the art. And I think
it especially gets important in the vision we have
for computing, where users are going to use it
across many different contexts. And so, to do
that end-to-end experience, it spans devices. So I think it’s important for us
to work at the intersection of hardware, software,
and services. And so that’s how
we think about it. And I think, you know, we invest
a lot more in our ecosystem. And I mentioned earlier, I’m incredibly excited
about the lineup that we have for this year
from our partners. So we do both, and we’re
very thoughtful about it. I think the scale
at which we’re doing it shows it’s working. And, you know,
I’m confident we’ll be able to strike that balance well. In terms of Google Assistant
on the Pixel, along with how how Search works, I think, you know,
definitely, you know, it gives us a way to iterate
and move faster and make sure it’s working
better for users. You know, our thesis
is that, you know, as we make it easier
for users to have Google at their fingertips
across what they are doing, and including many modes, whether they’re typing
or asking Google a question, you know, we find
that it overall benefits. And so it will be
a long-term trend, but I think
our early results show that our intuition
is right there. And so we’ll continue
approaching it that way. Walmsley: Thank you. Operator: Thank you. And our next question comes from Stephen Ju
of Credit Suisse. Your line is now open. Ju: Okay, thank you. So, Sundar, you called out
Google Play growth and emerging markets
in your prepared remarks, so I thought
from a revenue size standpoint, it would be one of the big bets
you would highlight. So I’m wondering how
you view your own Instant Apps as well as products
from other operators to let consumers try apps, either a messenger product
or in an HTML5 environment. Do these innovations present an
opportunity or a challenge for you and the Play franchise? And, secondarily, it seems
that the recurring theme in your prepared remarks is how AI is making
the consumer products better. Is there anything you can share in terms of how it may
be making monetization better? Thank you. Pichai:
So on Google Play, for me, what makes it work well
is, you know, just with the vision
of computing we have been talking about, about how, you know,
it works across context. You know, you need an ecosystem. You need an apps
and services ecosystem to work cohesively
across all of this. And that’s what I like about how
we’re approaching Google Play. And you saw us this quarter
see Google Play work beyond Android phones. They’re coming to Chromebooks. They work in Daydream. They work in Android Wear. And so it’s an end-to-end thing
which works well. And that’s
the most important thing, so that as a user, you know, whether you’re engaging
with a game or a TV show, that you can reliably get it across your computing
experiences. And we’ll adapt, and I think we
will drive innovations in Play to go where what’s right
for users and developers. And so, you know,
be it Instant Apps or driving better
HTML5 experiences, we invest in all that, and I think
we’ll move it all forward. On your second question,
you know, about how machine learning
and AI is improving our monetization, it definitely–I mean, just like we had many,
many launches last year, you know, which involved
machine learning being incorporated
across Google, including our
monetization products. Our monetization teams at Google have always been
at the cutting edge of, you know,
what I would call machine learning techniques
from early days on. So they are–they are doing it. It is early days, but I think we already have,
you know, really new insights. And so we’ll bake it in, you know,
over the course of the year. Ju: Thank you. Operator: Thank you. And our next question comes
from Ken Sena of Evercore. Your line is now open. Sena: Hi, maybe just another
question on YouTube. You know, can you expand
on the decision this quarter to remove third-party
cookie and pixel activity? It looks as though
you’re favoring something much more identity-based. And maybe if you could just
think through or explain a bit about the impetus there and maybe the trade-offs
for marketers, that would be great. Thank you very much. Pichai: I spoke about it
a bit earlier, but I think it’s important
that we evolve all of this from a user-centric standpoint. And, you know,
users have an identity. They have preferences. And so, for example, think
about it from a user standpoint. If they don’t like
one particular ad or they don’t want to see an ad
from a particular advertiser, they want it to work
across their experience, across their
cross-device experience. So we think about it that way, and so we’re working
towards a long-term experience that’s right for users and which
I think will make sense for advertisers
reaching users too. So I think we’re evolving it
jointly and thoughtfully, giving users control. And I think that’s the right way
to approach it over time. Sena: Thank you very much. Operator: Thank you. And our final question comes from the line of Justin Post
of Merrill Lynch. Your line is now open. Post: Thank you. I’d like to ask you first a question about ad coverage
and click rates. Maybe just your thoughts
on potential to increase ad coverage
now that you have a fourth link. Is there still room to help ad
clicks with coverage increases? And just as you think
out to this year, how do you feel about
the innovation pipeline in ads? Do you think there’s a lot more
you can still do in Search? And then, two,
housekeeping for you, Ruth. Maybe to just let us know what kind of equipment
was written off so we can think about
how recurring that might be, and any comment on the buyback
activity in the quarter. Thank you. Pichai: You know,
on our monetization efforts, our teams always
have been very thoughtful about planning
not just for the short term, but planning for the long term. You know, we don’t start
the year thinking our plan is to increase ad coverage
or something like that, right. We are–we have many
experiments in the pipeline. We see how user behavior
is evolving. And in conjunction with that,
we evolve our ad experience. For example,
as people use mobile, scroll more, et cetera, the user behavior changes, and we adapt to that
in a very, very disciplined way. So, you know,
last year you saw us maybe increase coverage
in a certain way. For example,
in desktop we removed ads on the right-hand side. So we take a very holistic
approach to these things. For me, I do think we have
a lot of headroom ahead. I still look at where most of,
you know, transactions happen and how that secular
transformation is underway. And so I think we have
a lot more headroom left. And Ruth… Porat: Yeah, in terms
of your second question, really not much more to add
on the first part. In terms of the buyback, we weren’t able to commence it
in the fourth quarter due to trading restrictions, but we do look forward
to getting back into the market. Post: Thank you. Operator: Thank you. And I’m showing no further
questions at this time. West: Thanks, everyone,
for joining us today. We look forward to speaking
with you again on our first quarter 2017 call. Operator: Ladies and gentlemen, thank you for participating
in today’s conference. This does conclude the program,
and you may all disconnect. Have a great day, everyone.

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