Alphabet : 2023 Q1 Transcript

This transcript is provided for the convenience of investors only, for a full recording please see the Q1 2023 Earnings Call webcast.

Alphabet Q1 2023 Earnings Call

April 25, 2023

Operator: Welcome, everyone. Thank you for standing by for the Alphabet first quarter 2023 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. To ask a question during this session, you will need to press *1 on your telephone. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Jim Friedland, Director Investor Relations: Thank you. Good afternoon, everyone, and welcome to Alphabet's First Quarter 2023 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, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC. 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, CEO Alphabet and Google: Thank you, Jim. And good afternoon, everyone.

I'm pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation.

On Cloud, we continue to be on a long and exciting journey to build that business. Cloud delivered profitability this quarter, and we remain focused on long-term value creation here.

Today, I'll give an update on the two themes I spoke about last quarter. One, our advancements in AI and how they are driving opportunities in Search and beyond; and, two, our efforts to sharpen our focus as a company. Then I'll talk about our momentum in Cloud, and close with our progress at YouTube.

First, the incredible AI opportunity -- for consumers, our partners and for our business. I've compared it to the successful transition we made from desktop to mobile computing over a decade ago.

Our investments and breakthroughs in AI over the last decade have positioned us well. In our

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last call, I outlined three areas of opportunity: Continuing to develop state-of-the-art large language models and make significant improvements across our products to be more helpful to our users; empowering developers, creators and partners with our tools; and enabling organizations of all sizes to utilize and benefit from our AI advances. We have made good progress across all three areas.

In March, we introduced our experimental conversational AI service called Bard. We've since added our PaLM model to make it even more powerful, and Bard can now help people with programming and software development tasks, including code generation. Lots more to come!

For developers, we've released our PaLM API alongside our new MakerSuite tool. It provides a simple way to access our large language models and begin building new Generative AI applications quickly.

A number of organizations are using our Generative AI large language models across Google Cloud Platform, Google Workspace, and our cybersecurity offerings.

For years, we've been focused on making Search even more helpful. From Google Lens to multisearch to visual exploration in Search, Immersive View in Maps, Google Translate, to all the language models powering search today, we have used AI to open up access to knowledge in powerful ways.

We'll continue to incorporate Generative AI advances to make Search better in a thoughtful and deliberate way. We'll be guided by data and years of experience about what people want and our high standards for quality. And we will test and iterate as we go, because we know that billions of people trust Google to provide the right information.

As it evolves, we'll unlock entirely new experiences in Search and beyond, just as camera, voice and translation technologies have all opened entirely new categories of queries and exploration.

AI has also been foundational to our Ads business for over a decade. Products like Performance Max use the full power of Google's AI to help advertisers find untapped and incremental conversion opportunities. Philipp will talk more about this in a moment.

And as we continue to bring AI to our products, our AI Principles and the highest standards of information integrity remain at the core of all our work.

As one example, our Perspective API helps to identify and reduce the amount of toxic text that language models train on, with significant benefits for information quality. This is designed to help ensure the safety of Generative AI applications before they are released to the public.

We're proud to have world-class research teams who have been advancing the breakthroughs underpinning this new era of AI. Last week I announced that we're bringing together the Brain team in Google Research and DeepMind into one unit. Combining all this talent into one focused team, backed by the pooled computational resources of Google, will help accelerate our progress and develop the most capable AI systems safely and responsibly.

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On to my second theme, the company's sharpened focus. I spoke last quarter about our commitment to invest responsibly and with discipline and to find areas where we can operate more cost effectively and with greater velocity.

We have significant multi-year efforts underway to create savings, such as improving machine utilization and finding more scalable and efficient ways to train and serve machine learning models.

We are making our data centers more efficient, redistributing workloads and equipment where servers aren't being fully used. This is important work as we continue to significantly invest in infrastructure to drive our many AI opportunities.

Improving external procurement is another area where data suggests significant savings, and this work is underway. And we are taking concrete steps to manage our real estate portfolio to ensure it meets our current and future needs. We will continue to use data to determine additional areas for durable savings.

Next, Google Cloud. I'm pleased with the ongoing momentum in Cloud. Our disciplined expansion of our product roadmap and Go-To-Market organization has helped to build one of the largest enterprise software companies in the world. We have consistently grown top-line revenues and improved annual operating margins, and we continued to do so this quarter.

Our growth has come from our deep relationships with large enterprises, our strong partner ecosystem and our product leadership.

Over the past three years, GCP's annual deal volume has grown nearly 500%, with large deals over $250 million, growing more than 300%. Nearly 60% of the world's 1,000 largest companies are Google Cloud customers.1 And many leading startups and millions of small and medium enterprises use Google Cloud.

We have also built a strong partner ecosystem. Over the last four years, the number of Google Cloud partner certified practitioners around the world has increased more than 15 times. The largest global system integrators have built 13 dedicated practices with Google Cloud, compared to zero when we started. And today, more than 100,000 companies are part of our Google Cloud Partner Advantage Program.

Our growth is also driven by our product leadership. We are bringing our Generative AI advances to our Cloud customers across our Cloud portfolio. Our PaLM Generative AI models and Vertex AI platform are helping Behavox to identify insider threats; Oxbotica to test its autonomous vehicles; and Lightricks to quickly develop text-to-image features.

In Workspace, our new Generative AI features are making content creation and collaboration even easier for customers like Standard Industries and Lyft. This builds on our popular AI-powered Workspace tools - Smart Canvas and Translation Hub - used by more than 9 million

• Based on 2022 Forbes Global 2000 list.

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paying customers.

Our product leadership also extends to data analytics, which provides customers the ability to consolidate their data and understand it better using AI.

New advances in our Data Cloud enable Ulta Beauty to scale new digital and omnichannel experiences while focusing on customer loyalty; Shopify to bring better search results and personalization using AI; and Mercedes-Benz to bring new products to market more quickly.

We've introduced Generative AI to identify and prioritize cyberthreats, automate security workflows and response and help scale cybersecurity teams.

Our Cloud cybersecurity products help protect over 30,000 companies, including innovative brands like Broadcom and Europe's Telepass. We are successfully integrating Mandiant with our products, including Mandiant Threat Intelligence and Breach Analytics.

Our open approach to AI development, coupled with our industry-leading TPUs and best-in-class GPUs from NVIDIA, enable innovative companies to tackle any AI workload with speed and flexibility. AI21 Labs, Replit, Midjourney, and many others build and train foundation models and Generative AI platforms.

We are the only cloud provider to announce availability of NVIDIA's new L4 Tensor Core GPU with the launch of our G2 VMs, which are purpose-built for large inference AI workloads such as Generative AI.

Turning next to YouTube. Let me start by thanking Susan Wojcicki for her terrific leadership of YouTube for nine years. She recently transitioned into an advisory role with Alphabet this quarter, with Neal Mohan, a longtime leader at Google and YouTube, becoming the new head of YouTube.

Here are a few highlights from the quarter. YouTube Shorts continues to see strong momentum with creators. Last year, the number of channels that uploaded to Shorts daily grew over 80%. Those posting weekly on Shorts saw the majority of new channel subscribers coming from their Shorts posts. The Living Room remained our fastest growing screen in 2022 in terms of watchtime, and we're seeing growth and momentum internationally.

On our subscription business, we rolled out several new updates to YouTube Premium. Premium subscribers can now queue videos on phones and tablets, stream continuously while switching between devices, and auto-download recommended videos for offline viewing.

And we have great momentum around YouTubeTV and YouTube Primetime Channels. We've announced pricing for the NFL Sunday Ticket offering, which will help to drive subscriptions, bring new viewers to YouTube's paid and ad-supported experiences and create new opportunities for creators.

To close, across the company, we are excited about helping people, businesses and society reach their full potential with AI. We'll share updates at Google I/O about how we are using AI

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across our products, including our Pixel devices, and share some exciting new developments for Android.

Thanks to our employees around the world who continue to work hard to advance our mission. After nearly 25 years, the work to organize the world's information and make it accessible and useful is as urgent as ever, and I look forward to the work ahead.

Over to you, Philipp.

Philipp Schindler, SVP and CBO, Google: Thanks, Sundar. And hey, everyone. It's great to be here today.

I'll kick off with Google Services performance in the first quarter, then provide color into our key opportunity areas, and then turn it over to Ruth for more on our financial performance. Google Services revenues of $62 billion were up 1% year-on-year, including the effect of a modest foreign exchange headwind.

In Google Advertising, Search & Other, revenues grew 2% year-over-year, reflecting an increase in the Travel and Retail verticals, offset partially by a decline in Finance as well as in Media & Entertainment.

In YouTube Ads, we saw signs of stabilization in performance, while in Network, there was an incremental pullback in advertiser spend.

Google Other revenues were up 9% year-over-year, led by strong growth in YouTube subscriptions revenues.

Now, let's double-click into the three areas I laid out last quarter where we see clear opportunities for long-term growth in advertising. Number one, Google AI. Number two, retail, which cuts across all of our Ads products and surfaces. And number three, YouTube.

First, Google AI. I've said before, AI has long been an important driver of our business. Advancements are powering our ability to help businesses, big and small, respond in real-time to rapidly changing market and consumer shifts and deliver measurable ROI when it's needed most.

In Q1, we continued to innovate across our products. Take core Search for example. In targeting, we updated Search keyword relevance using the latest natural language AI from MUM models to improve the relevance and performance of shown ads when there are multiple overlapping keywords eligible for an auction.

In bidding, we improved our Smart Bidding models to bid more accurately based on differences in search ad formats -- in other words, bid more effectively depending on how a user wants to engage with an ad.

In creatives, we opened our Automatically Created Assets beta to all advertisers in English. ACA generates text assets alongside your responsive search ads and uses AI to help reduce

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