Alphabet Inc.
Q3 2020 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by, and welcome to the Alphabet Third Quarter 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. . I'd now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.
  • James Friedland:
    Thank you. Good afternoon, everyone, and welcome to Alphabet's third quarter 2020 earnings conference call. With us today are Sundar Pichai 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, including the effect of the COVID-19 pandemic on those areas, 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 and in our Form 10-Q for the quarter ended September 30, 2020 expected to be filed with the SEC later today.
  • Sundar Pichai:
    Thank you, Jim, and good afternoon, everyone. Thanks for joining us today. This quarter, our performance was consistent with the broader online environment. It's also testament to the investment we've made to improve search and deliver a highly relevant experience that people turn to for help in moments big and small. We saw an improvement in advertiser spend across all geographies, and most of verticals, with the world accelerating its transition to online and digital services. In Q3, we also saw strength in Google Cloud, Play and YouTube subscriptions. This is the third quarter we are reporting earnings during the COVID-19 pandemic. Access to information has never been more important. This year, including this quarter showed how valuable Google's founding Product Search has been to people. And importantly, our products and investments are making a real difference as businesses work and get back on their feet. Whether it's finding the latest information on COVID-19 cases in their area, which local businesses are open, or what online courses will help them prepare for new jobs, people continue to turn to Google search. You can now find useful information about offerings like no contact delivery or curbside pickup for 2 million businesses on search and maps. And we have used Google's Duplex AI Technology to make calls to businesses and confirm things like temporary closures. This has enabled us to make 3 million updates to business information globally. We know that people's expectations for instant perfect search results are high. That's why we continue to invest deeply in AI and other technologies to ensure the most helpful search experience possible. Two weeks ago, we announced a number of search improvements, including our biggest advancement in our spelling systems in over a decade. A new approach to identifying key moments and videos, and one of people's favorites hum to search which will identify a song noticed based on the humming. We also announced that bird a huge breakthrough in natural language understanding that we introduced last year. Now we improve results for almost every English search query. We are also investing in improving the shopping experience in search to help people find the best products and prices available from a wide range of merchants. We recently added easy to see price comparisons to help consumers know if they're getting a good deal.
  • Ruth Porat:
    Thank you, Sundar. We are very pleased by our results in the third quarter, which reflect both broad based increases in advertiser spending in search and YouTube, as well as ongoing strength in our non-advertising revenue lines, in particular Google Cloud and Play. Starting with consolidated Alphabet results, our total revenues in the quarter were $46.2 billion, up 14% year-on-year and up 15% in constant currency. Our total cost of revenues was $21.1 billion up 20% year-on-year, primarily driven by other cost of revenues, which was $13 billion and up 29% year-over-year. The biggest factors here again this quarter were costs associated with our data centers and other operations including depreciation, and then content acquisition costs primarily driven by costs for YouTube's advertising supported content, followed by cost per subscription service content. Operating expenses were $13.8 billion up 1% year-on-year, reflecting both the impact of actions taken earlier in the year as a result of COVID as well as lapping a $554 million legal settlement in the third quarter of 2019. In terms of the three component parts of , first, the deceleration in R&D growth was due primarily to slower headcount. Second, the year-on-year decline in sales and marketing expenses, reflects the planned reduction in advertising and promotional spend that we implemented towards the end of the first quarter. Third, G&A growth reflects the lapping of the settlement. All three categories benefited from lower G&A expenses due to COVID.
  • Operator:
    Thank you. . And our first question comes from Eric Sheridan from UBS. Your line is now open.
  • Eric Sheridan:
    Question maybe I could ask to Sundar on the high level. You called out some of the innovation you're aiming for over the medium to long-term with respect to search, can you take a step back and maybe give us your sense of how search is going to evolve from a product it is today where there's a lot of input by the user to sort of the push dynamic with the Discover feed and Discover ads that could drive both engagement and monetization across your platform? And the second part of the question was, it seems like you're taking a little bit of a different tactic with your hardware strategy this year, they're a little bit less of it. And it was more on the mid to low render the price range of hardware, how does hardware and broadly time the assistant into the hardware strategy fit broadly similar into your view for where search is going to the medium to long-term? Thanks so much.
  • Sundar Pichai:
    Thanks, Eric. Good questions. On search, you're right, today, particularly with mobile and ambient computing, that is, you having access to computing across other form factors. I think information both you go looking for it and there are times, it's important that you have relevant information at your fingertips. So I do think about it as a holistic user journey. And obviously, in search will continue to evolve Discover has been very good in terms of Discover and YouTube both play a role in making sure people are getting relevant information. And, I think for us, it's important holistically, we're meeting users information needs and out of which, the monetization opportunity also works as well. So long -- this is why, be it, Discover or be it how we pick up on YouTube, all of that matters for us. On your second question on our hardware, I'm excited about the, we are doing some deeper investments in hardware, which, which are some of it take students for years to come together. And so, excited at the terrific roadmap ahead. I think we have definitely shown that Pixel 4a Pixel 5, clear value proposition, and we'll build on that. You know our portfolio, you know, we are thoughtfully thinking about what are the important form factors, which matters and we do think about it with the view of fair search and assistant will be important as well. So in many ways, hardware is there to strategically benefit both how we guide the Android ecosystem. How do we make sure information is right there at user's fingertips. And so those are both strategic views we take into it as well, but I'm excited about the roadmap ahead and next year you would see as lean more into some of our deeper investments will come into play there.
  • Operator:
    Thank you. And our next question comes from Doug Anmuth from JPMorgan. Your line is now open.
  • Doug Anmuth:
    Thanks for taking the question. Ruth, we appreciate the incremental color on 3Q and 4Q expenses, which was hoping that you could help us understand the cost structure a little bit more, kind of as we're coming out of this and just know whether you're anticipating any more notable changes, just coming out of the pandemic kind of around the sustainability of the margin improvements that you saw in this quarter. Thanks.
  • Ruth Porat:
    Thanks for that, Doug. So as I said, as a result of COVID, we did make tactical adjustments to slow the pace of spent in certain categories. And that, that started late in the first quarter. And in part, that's what you see here, plus the impact from the improvements in revenue performance. And we do remain focused on optimizing efficiency where we can, we've said that on many prior calls, but as we've also discussed with you on prior calls, as both Sundar and I noted, today, we are committed to making the right investments to support long-term profitable growth. And I think what's exciting in this environment, there appears to be an acceleration in digital transformation that underscores the importance of the products and services that we provide, and the longer term opportunities. So we will continue to invest to best position us for the long-term opportunity. An obvious example is cloud, we do intend to maintain a high level of investment, given the opportunity we see that includes the ongoing increases in our go-to-market organization, our engineering organization, as well as the investments to support the necessary CapEx. So hopefully that gives you a bit more color there.
  • Doug Anmuth:
    Thank you.
  • Operator:
    Thank you. And our next question comes from Heather Bellini from Goldman Sachs. Your line is now open.
  • Heather Bellini:
    Great, thank you very much for taking the question. Sundar, I have a question for you. Just Thomas has been the Head of Google Cloud now for around two years, if I remember correctly, I'm just wondering, what do you see as the biggest changes he's put into place that has allowed the business to start gaining what appears to be materially more share? And as you look ahead to 2021, and what's going on with digital transformation, what would you say is top strategic priorities would be? Thank you.
  • Sundar Pichai:
    Thanks, Heather. A couple things stand out for me, I think it's been a very consistent focus strategy. So the focus on the five major geographies, the four customer segments in the six priority industries, healthcare, retail, financial services, media, entertainment, manufacturing and public sector, that focus and going deeper, and scaling our go-to-market, both in terms of our people, our partner, partners setting, that's been key. The second thing I would say is some of the key differentiators are playing out particularly as we have taken them deeper as unique industry solutions. So going deeper and having solutions and in some of those cases where we are now pricing based on value. I think that kind of deeper play, something I'm very excited about, definitely have strengthen just based on our underlying technology. So we do have differentiation in areas like data analytics, AI, et cetera. So that's been, that's been huge as well. But I'm pleased with the execution obviously, in this there is a time lag between when you hire the sales and when we train and when you enable them to be more productive. And that's the investment Ruth has been talking about. And I can see it ramping, and they can see the results come into play. So credit towards that focus and execution and so looking forward to the next .
  • Heather Bellini:
    Great. Thank you very much.
  • Sundar Pichai:
    Thanks for converging. And Best wishes.
  • Heather Bellini:
    Thank you.
  • Operator:
    Thank you. And our next question comes from Brian Nowak from Morgan Stanley. Your line is now open.
  • Brian Nowak:
    Thanks for taking my question. Sundar, I wanted to ask one about ecommerce specifically, you know, it seems to become increasingly competitive within the ecommerce funnel. So maybe talk to us about one, what types of consumer behavior changes? Are you seeing within ecommerce search on the platform? And then, in your mind, what are the key priorities of investment, you need to really execute on to ensure you stay at the top of the funnel within ecommerce? Thanks.
  • Sundar Pichai:
    I think thanks that standard, first of all, I'm excited that, the set of announcements and progress we've had in the last few months. And obviously, we're really focused on the user experience, and we want to make sure, as a consumer you vide, comprehensive, high quality, inventory and offerings and experience on the platform, our free shopping listings, which we launched in the U.S. is now available in 48 countries around the world. Additionally, we eliminated commission fees. So for the buy on Google Checkout option, opened the platform up to, you know, PayPal Shopify for integration as well. So that gives rise to comprehensiveness. And we are focused on quality there. In terms of the funnel and behavior, to me, what's interesting is, obviously, search captures the intent of the moment and the breadth of search, I think has been, has been a real asset. And, you know, both you -- as users adapt, advertisers adapt to so you can see that see the dynamic play in real time. But you do see, I would say YouTube is an important platform for ecommerce as well. I can see advertisers in the YouTube of the mid funnel level, even currently, if that's not the intent at that moment, investor, create demand, create interest, and so on. So, for us EC commerce working across the platform, and I think that's an opportunity and then making sure the rest of the experience is good for users is something we are deeply focused on.
  • Brian Nowak:
    Thanks Sundar.
  • Operator:
    Thank you. And our next question comes from Brent Thill from Jefferies. Your line is now open.
  • Brent Thill:
    Good afternoon. Ruth, you called brand advertisers coming back to YouTube, I'm just curious if you could give us a sense of where you're seeing that strength in kind of where you at relative to pre covered levels, with, with those advertisers?
  • Ruth Porat:
    So overall, we're pleased at the degree to which advertisers really have reactivated their budgets, this in the third quarter, they reacting in part two, I think, evidence that consumers are showing strong demand across nearly all verticals, it's everything from home and garden to computer to work from home. And so very helpful there. And then YouTube's strong watch time growth enables advertisers to reach audience that they can't reach on TV, as we've often talked about. And so they're increasingly looking to ask to help them reach people who are going to YouTube to learn new topics and engage with fresh entertaining content, great, great, unique content. So it's, it's been an opportunity, we're pleased to senior performance in the third quarter.
  • Brent Thill:
    Thank you.
  • Operator:
    Thank you. And our next question comes from the line of Justin post from Bank of America. Your line is now open.
  • Justin Post:
    Great, thank you so much, maybe one for Sundar and one for Ruth. Sundar, thanks for the update on the DOJ. As you think about all the regulators all over the world, is there. Is there any hope of coming to a middle ground here? How are you thinking about how far apart you guys are in different regions? And then maybe for Ruth, on the YouTube opportunity, if you assume about 2 billion users, you're on a run rate of maybe $10 per user. I just wondering how you how you're thinking about the monetization? Are you still very early and if you can give us any help on what the margins might look like? Thank you.
  • Sundar Pichai:
    Ruth, you want to go ahead --
  • Ruth Porat:
    So look, in terms of YouTube, as I said, we are pleased with the ongoing momentum that you see in the revenue line, I think, as we've talked to you about quite frequently, in our ad supported business within YouTube, we do pay out a majority of revenues to all of our content creators, we pay all of the infrastructure and networking costs that's you know, for storing for serving video or otherwise for running YouTube. And that includes marketing, supporting content creators, there's quite a bit more that we think is invaluable for creators in the overall ecosystem to make sure we're creating not only great experiences for users and creators, but really the right overall ecosystem. And we've talked about that in the context of how we invest, protect, content -- protect the content, that people are seeing content, moderation investments we view as really an invaluable part of what we're doing and critically important. So we're continuing to support that do view, the experience that both creators and users have is just really differentiated as a result. And then on the subscription side, we're continuing to build it out, as Sundar noted in his opening comments, both YouTube Music premium and YouTube TV, do you have higher content acquisition costs as a percentage of revenues than YouTube ads, and we are early there continuing to build out that subscriber base.
  • Sundar Pichai:
    And Justin, on the regulatory front, scrutiny is not new for us. And in some ways, it's now sector wide, and not surprisingly, so. We will engage constructively where possible. And as we have shown through some of the past cases, when there is -- we'll be confident about the benefits we bring to our users, we'll make our case where there is feedback or rulings, we'll be flexible and adapt and so we are building that into it. I think while there's a lot on the legislative and regulatory front, as some of this gets resolved, it also creates certainty, and in some cases, clarity and opportunities as well. And so, and so that's the framework with which we approach it. And we'll take a long-term view towards it. And but -- at the end of the day, what's in our control is our ability to relentlessly focus on users and build great products. And that's where most of our energy will go into.
  • Justin Post:
    Yes, thank you.
  • Operator:
    Thank you. And our next question comes from the line of Mark Mahaney from RBC. Your line is now open.
  • Mark Mahaney:
    Thanks two questions, please. It sounds like you're going to provide more disclosure on Google Cloud in the fourth quarter, will that also be on the profitability of Google Cloud or could you address the question of whether Google Cloud has reached a point of scale where it's no longer dilutive to overall margins, and then briefly, two new revenue opportunities, or growing revenue opportunities over the year Google Maps and the Discover tab, any update or any new data points that suggest a monetization opportunity with those two assets? Thank you.
  • Ruth Porat:
    So thanks for that Mark. And when we break out Cloud, and we will be also reporting that is the fourth quarter results, but we'll be providing full year results for 2018 ‘19 and ‘20. We'll be providing not just the revenue disaggregation data that we expanded earlier this year, but we will be adding operating income for each of our segments, which we think is the most relevant data. And the point, that both Sundar and I have underscored is that we are investing aggressively in cloud given the opportunity that we see. And frankly, the fact that we were later relative to peers were encouraged -- very encouraged by the pace of customer wins, and the very strong revenue growth in both GCP and workspace. But we do intend to maintain a high level of investment to best position ourselves. And I kind of went through some of those items that the go-to-market team, the engineering team and CapEx. And so we describe this as a multiyear path, because we do believe we're still early in this journey.
  • Sundar Pichai:
    On a Maps and Discover, et cetera, again, I think I spoke a little bit earlier about thinking through more holistically an example where we -- I think worked well as you know, as developers, we're looking to promote apps that are universal app campaigns, you could really reach across and it's a good model to think about recently, for example, to serve small and medium businesses, we expanded smart campaigns to 150 countries and they're a small business owner, you can set up your first campaign, create your first ad in 15 minutes from the from your mobile device. So for me thinking about these surfaces, as you know, we'll do the hard work to make sure the most relevant information gets and thinking about it more holistically. And I think gives us a chance to also engage users in the way they want us to, sometimes when they come looking for it, and sometimes when they proactively want information given to them. And so that's the overall view and I think the opportunity is very exciting ahead.
  • Mark Mahaney:
    Okay, thank you very much.
  • Operator:
    Thank you. And our next question comes from the line of Dan Salmon of BMO Capital Markets Your line is now open.
  • Daniel Salmon:
    Great. Thanks, and good afternoon, everyone. Sundar, in your response to the DOJs lawsuit compared to your search partnerships to how brand might pay a supermarket to be at the end of the row or at high level. We've also heard Philip Schindler talk about your addressable market being potentially twice as large as commonly viewed and maybe that includes things like those payments inside supermarkets. So my question is two parts. Firstly, is it fair to tie those two types of comments together and assume that they're related to each other? And then second, could you maybe talk about how that might matter to your bigger picture thinking about the advertising and ecommerce opportunity for Google? And in particular, the competitive environment you face?
  • Sundar Pichai:
    Yes, Dan at a high level stepping back from it all? We are -- our mission is to provide information, so the competitive environment we faces, particularly with mobile and user looking for information, there's – so many choices they have. And so the question is, you know, making should Google is a relevant way by which they get that information. And, you know, you can imagine when people are looking to buy products, or the competitors that exist, travel, booking hotels or any category you take and so for us that's why I talk about holistically competing and making sure we can provide relevant information is both competition we face for mindshare, and that's the opportunity we have ahead. In terms of specifics of the DOJ case and stuff and confident, you know, we have approached everything, both with the view of making sure we create the best user experience and be -- we really want, we've always built Google for everyone. So we want it to be available on all platforms and be convenient for users to access our services and as part of that partner with other companies in doing so. And so look forward to making our case there. But it's definitely early days. And we're still reviewing an understanding it all. And I'm sure we'll update more as time goes by.
  • Daniel Salmon:
    Okay, thank you.
  • Operator:
    Thank you. And our next question comes from the line of Colin Sebastian from Baird. Your line is now open.
  • Colin Sebastian:
    Thanks, I have a couple here as well. Maybe just a follow up on the shopping question. Specifically on YouTube, if you could expand on the role that shopping and shopping ads are now playing in the growth strategy there. And on Google workspace, it seemed like this is an unique opportunity, with work from home to really drive adoption and monetization of the services, including meet as well as bundling with cloud services, so I wonder if you could provide little more detail on the levels of usage and engagement you're seeing with those applications? And how you plan to monetize those going forward. Thank you.
  • Sundar Pichai:
    Great, on shopping and YouTube, definitely say, we are on the earlier part of the journey. But we have seen the strength in YouTube for direct response and on a few other categories. And I think the experiences we see there, I think can directly carryover to commerce. And as we build out the experience, so I see that as an opportunity. I earlier also mentioned about what searches currently capturing the intent at that given time, YouTube, advertisers can take a longer term view create brand awareness, create interest, and so on. So that also offers, opportunity. So we today in many, many categories have creators with very compelling content. And I've always felt things work well if you match user interest and it's very relevant to users. And so I think commerce, there is a lot of commercial activity on YouTube organically. And so I see it as a long-term opportunity. On Google workspace, I'm very excited that, we both have strong growth, I mentioned meet metrics earlier, that we saw a peak of 235 million daily meeting participants in Q3 and more than 7.5 billion daily video call minutes. Definitely significant growth and meet as well as our other products like docs drive and chat. But Google workspace also now creates the unified experience and I think we are definitely seeing a lot of interest. And demand there, I do think COVID is really accelerating the future of work. And many of the trends there are, you know, will last through time, and I think gives all of us a chance to reimagine this, what would we imagined? What does collaboration and productivity at scale including people working remotely looks like. And we plan to be at the forefront of that, and some excited for the opportunity there.
  • Colin Sebastian:
    Great, thank you.
  • Operator:
    Thank you. And our final question comes from the line of Ross Sandler from Barclays. Your line is now open.
  • Ross Sandler:
    Hi, just two questions. If we look at search, your growth rates in January and February compared to today, so pre-COVID versus today, I guess how many categories are above the have growth rate? Is travel the only large category at this stage that's running below your pre-COVID growth rates in search? And then the second question is on the topic of the Apple search agreement, so as you guys said in your blog post, based on other agreements, where you seeing things change hands, you didn't really lose a lot of query volume after the change. So what do you think the recapture rate of queries on the so for the toolbar would be if that deal were to change hands? Is this really a COVID situation or is it something that we should be able to manage through? Thanks a lot.
  • Ruth Porat:
    So in terms of your first question, as we've often said, we have a very diverse business globally, and that's across sectors, customer size, geographies. And with respect to sectors, we saw broad based improvement across virtually all basically what you see in the broader economy, and we don't break out more than that, but it was, quite broad based. In terms of your, second question, Sundar, do you want to take that?
  • Sundar Pichai:
    On search, as I said, you know, for a long time, we work hard to make sure users can conveniently access us. Most of our partners choose us, because they are the best search provider users find us having the highest search quality. And so there's organic demand for it. And we believe in investing in our experience across all our platforms. And so we are definitely committed to making sure we can serve our users everywhere and we are really focused on it.
  • Operator:
    Thank you. And that concludes our question-and-answer session. I'd like to turn the conference back over to Jim Friedland for any closing remarks.
  • James Friedland:
    Thanks, everyone, for joining us today. We know you all have a busy evening. We look forward to speaking with you again on our fourth quarter 2020 call. Thank you and have a good evening.
  • Operator:
    Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.