Alphabet Inc.
Q4 2020 Earnings Call Transcript

Published:

  • Operator:
    Welcome, everyone, and thank you for standing by for the Alphabet Fourth Quarter 2020 Earnings Conference Call. . I would 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 Fourth Quarter 2020 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, 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-Q filed with the SEC. Additional information will also be set forth in our upcoming Form 10-K filing for the year ended December 31, 2020.
  • Sundar Pichai:
    Thank you, Jim, and good afternoon, everyone. 2020 was a year unlike any other. We are proud that people continue to choose Google's products to stay informed, connected and comforted during uncertain times. Being helpful to people in moments big and small is the foundation of everything we do. The past year also accelerated the shift to cloud and adoption of online services. This has profound implications for all companies and consumers, and we are pleased that so many trust us to help them make this transition. In particular, Google's products and support have been a lifeline for millions of small and medium businesses hit hard by the pandemic. Today, I'll review some of the important work we have done this quarter across Google and Alphabet with a particular focus on our growing cloud business, which we are breaking out as a separate segment for the first time. Then I'll welcome to the call Google's Chief Business Officer, Philipp Schindler, who many of you know from investor conferences and events. Philipp will speak about partnerships, business and advertising trends in the Google Services segment. We have heard that you’d appreciate more texture and detail there. Then Ruth will go through the quarter in more detail. First, some highlights at Google. Since the pandemic began, our teams have built new features and products to help people and businesses. Now we are helping with the complex challenge of getting vaccines to billions of people around the world. Vaccination locations have started to roll out in Google Search and Maps. Google Cloud's Intelligent Vaccine Impact platform is helping authorities improve vaccine distribution and forecasting. We are providing substantial new ad grants to the CDC, the World Health Organization and others to promote vaccine education. We're also making direct grants to organizations addressing racial and geographic disparities in vaccination access, plus opening up Google's facilities as vaccination clinics as needed. Elsewhere, in Maps, we added a new community feed in the Explore tab, and now you can track takeout and delivery orders when you book or order from Google Maps. At YouTube, we are building products to help creators benefit from 2 important trends
  • Philipp Schindler:
    Thanks, Sundar, and good afternoon, everyone. It's great to be joining you today. We're pleased with Google Services revenue of $52.9 billion in the fourth quarter, which continued the significant rebound from the negative impact of COVID earlier in the year. Two trends drove the strong results across Search, YouTube and network advertising. Consumers continued to move more of their activity online, and advertisers responded to the shift in consumer behavior by reactivating spend that they had paused earlier in the crisis.
  • Ruth Porat:
    Thank you, Philipp. We are very pleased with our exceptional fourth quarter performance after an unprecedented year. For 2020, total Alphabet revenues were $183 billion, up 13% year-on-year or up 14% in constant currency. With our new segment disclosures this quarter, I'll start with quarterly results at the Alphabet level, followed by segment results and conclude with our outlook. My focus will be on year-on-year comparisons for the fourth quarter, unless I state otherwise. For the fourth quarter, our consolidated revenues were $56.9 billion, up 23%, which reflect broad-based increases in advertiser spending in Search and YouTube within Google Services as well as ongoing strength in Google Cloud. Our total cost of revenues was $26.1 billion, up 24%, primarily driven by other cost of revenues, which was $15.6 billion and up 25%. The biggest factors here were
  • Operator:
    . And our first question comes from Eric Sheridan from UBS.
  • Eric Sheridan:
    I hope everyone is safe and well on the team out there as well. Maybe I'll try first on Cloud. I don't know if it's better to Sundar or to Ruth, but can you just conceptually help us understand how to think about the opportunity versus Cloud and how it factors back into which you want to invest against the opportunity or, possibly, maybe even accelerate the opportunity by looking at inorganic paths to growing scale vis-à-vis competition in the space? And then maybe for Philipp if I can. YouTube continues to evolve as a platform. There's now subscription offerings. You highlighted the strength you're seeing in DR. Could you talk a little bit about the path for monetization in the coming years and how we should think about the opportunity against a large-scale audience and engagement you see at YouTube broadly?
  • Sundar Pichai:
    On Cloud, obviously, we see how early customers are in the shift. We see the large TAM ahead and, definitely, the market dynamics. And our momentum, in the context of the market, is what is the framework which we are thinking about, the scale of investments and the pace of investments. Obviously, it's an area in which the longer you are in, the cohorts add up and so contributes more and the economies of scale starts working as well. But we are definitely investing ahead to making sure we are able to serve the customers globally across all the offerings they are interested in, and that's how we are thinking about it. Ruth, I'm not sure you want to add more.
  • Ruth Porat:
    I think that's the main point, just given the sheer scale of the opportunity and our position, investing to really position ourselves well across industries and geographies. And the key elements of it, I tried to call out in the opening comments
  • Philipp Schindler:
    Yes. And on your question on YouTube, on the overall development and the subscription side, our Direct Response business on YouTube was practically nonexistent three years ago. And now it's one of our largest and fastest-growing ad offerings on YouTube. And with TrueView for action, we're actually making it easier for advertisers to unlock opportunities to reach audiences with video campaigns. And just to give you a few numbers, 60% of TrueView for action customers are new to YouTube. And we more than doubled the number of active advertisers using TrueView for action in the first 6 months of 2020. And we're really tapping into the tremendous innate commercial behavior on the platform. 70% of YouTube viewers are saying they bought a brand as a result of seeing it on YouTube. I talked about L'oréal earlier. MasterClass is another great example. Online learning has become a huge opportunity, and they use TrueView for action to connect the right people to the right content and saw really big, like 140% increase in clicks to their sites, 70% increase in sign-ups to courses and so on. YouTube continues, in our view, to be amazing for brand advertisers as well. Our brand business was hit hard in the early stages of the pandemic, rebounded in Q3 and into Q4. And it really helps advertisers reach younger audiences. They can reach anywhere. We now reach more 18- to 49-year-olds than all linear TV networks combined. Watch time is increasing. Advertiser effectiveness is getting better and better. And so this is a very nice development on the subscription strategy. Maybe just briefly, music is an incredibly popular vertical on YouTube and, obviously, a key part of the overall experience. We found that users wanted a premium YouTube experience and we -- basically the ability to download songs and videos. YouTube Premium provides additional revenue streams, of course, for music labels and publishers as well. In 2019, YouTube paid the music industry over $3 billion. We have over 30 million music and premium paid subscribers. We are now operating over 95 countries, so members get a lot of extra benefits, yes.
  • Operator:
    And our next question comes from Doug Anmuth from JPMorgan.
  • Douglas Anmuth:
    Ruth and Sundar, I just wanted to follow up on Eric's question a bit. Anything else you can add just in terms of the significant inflection that you saw on Google Cloud backlog there? And I guess, in particular, curious what you're seeing in terms of benefit and success as you're leveraging Alphabet more broadly like in the Ford deal. And then how do you think about Google Cloud margins structurally kind of long-term relative to peers? Any color there would be helpful.
  • Sundar Pichai:
    Maybe I'll start with customers are looking for digital transformation. And depending on the sector they are in, they are definitely interested in a broader solution set across the breadth of what Google and Alphabet can bring. We see this in health care, our efforts in Google Health, work that's happening in Verily, all end up helping. Ford is a great example of, I'd say, thinking longer term not just for Cloud but Android auto-powering their vehicles. And so these are big transformations cutting across the company. And one of the areas where we are really executing is leveraging our global business operations that Philipp runs and partnering closely with Thomas' teams, and that's definitely brings in a lot of synergies here. On your second question, on the broader stuff, the one thing I would say is -- I mentioned a part earlier, we get into these long-term deals. And so over time, as you add more cohorts, that contributes to the margin structure. It is -- the scale of the product offerings, the number of areas and the number of regions in the world, there's a much more significant investment. And so there is definitely a fixed cost structure associated with it, and we are also investing ahead. But as we scale up the business, we expect the trends to be favorable.
  • Operator:
    And our next question comes from Brent Thill from Jefferies.
  • Brent Thill:
    You mentioned you accelerated -- saw accelerating brand spend in the quarter. And many investors are asking the sustainability and what you're seeing in that as you head into the beginning of this year. If you could just talk directionally in terms of how your clients are acting as they head out of the holiday season, that would be helpful.
  • Ruth Porat:
    Sure. I'll take that. As we've each noted, the financial results really did reflect this increase in advertiser activity. And that was in part unlocking budgets that they had paused earlier in the year as well as really reflecting the increase in consumer online activity. The largest contributor, as Philipp mentioned, was retail, the largest contributor to the year-on-year growth of the ads business. But I would say tech, media and entertainment as well as CPG were also meaningful contributors. And for Search, we saw ongoing improvement in advertisers spend broadly. For YouTube, Direct Response, as Philipp talked about, really did maintain a very high level of growth. And the acceleration in overall YouTube revenue growth reflects a pickup in brand advertising across all verticals on top of the ongoing strength that we saw in DR. And then in network, also same point, it's this pickup in advertiser spend, as Philipp noted. It was led by growth in AdMob and Ad Manager. So we're really pleased with Q4. It was a great end to a challenging year. And when we think about 2021, I made the point in the opening comments, we obviously have easier year-on-year comparisons in the first half as we anniversary the effects of the pandemic. So not much more to add, we -- it was a strong quarter, and we feel really good about the level of activity.
  • Operator:
    And our next question comes from Heath Terry from Goldman Sachs.
  • Heath Terry:
    Great. I appreciate the level of detail on the drivers behind the acceleration in Search and YouTube. I was wondering if you could go a bit further and disaggregate or give, even just qualitatively, the drivers behind that acceleration between pre-pandemic advertisers returning to prior spending levels versus new advertisers or new advertiser spend being allocated to the platform.
  • Ruth Porat:
    Well, I think the main point is sort of this mega comment that we saw a slowdown. And as Philipp said, and we've talked about on prior calls, one of the first things that happens is a step-back and then you see, as users reengage and activity picks up and the effectiveness of advertising the ROI available, you see advertising come back in. I remember talking about this throughout last year that we had seen this actually going back to the prior financial crisis. And what you've seen is just a broad-based reengagement, which we're really pleased about across industries. And it's also -- as Philipp noted in his comments, there's been a tremendous opportunity really to step in here and help small, medium businesses as they were evolving and adapting to this new digital world, and it's been quite key there as well.
  • Operator:
    Our next question comes from Brian Nowak from Morgan Stanley.
  • Brian Nowak:
    I have two for Philipp. Philipp, first one, I appreciate all the color on retail and commerce, the merchant community growing so strong in the last year. I'd be curious to hear about your discussions now with merchants and sort of what the largest friction points that they're looking for you to solve and sort of continue to help them as the world reopens, kind of the merchant discussions. And then secondly, a question on one of the earlier products on Discover feed, I'd love to hear about sort of early learnings on Discover feed and how you think about hurdles you need to overcome to monetize that.
  • Philipp Schindler:
    Yes. Thank you very much for the question. Look, at the highest level, we want to build a healthier e-commerce ecosystem. When people come to Google to shop, we want them to help find the best product with the best prices from really the widest range of merchants, and we want our results to be as comprehensive and relevant as possible. And we took some significant steps last year, as you know, on Google Shopping. And in many ways, we really see them as a return to our first principles here
  • Operator:
    And our next question comes from Colin Sebastian from Baird.
  • Colin Sebastian:
    Maybe for Sundar or Philipp, a follow-up on YouTube. Just given the strength of those services ads and subscriptions during the pandemic, I wonder if part of what we're seeing is more of an acceleration from TV ad budgets from linear spending to more of YouTube spending, I mean given also the momentum we've seen in over-the-top over the last 9 months or so. And then given some of the changing industry dynamics around privacy, including what you've already announced around browser cookies, wondering what plans might be as well for Android and how we should think about potential impact on ad revenues broadly as a result of privacy changes.
  • Philipp Schindler:
    Yes, I can take that. We've seen brands steadily shift budgets to YouTube to complement their linear TV buys as TV audiences really become more fragmented. And as traditional TV ratings continue to decline, TV advertisers are turning to streaming platforms like YouTube to reach people who are no longer watching TV. Connected TVs are our fastest-growing screen. In the U.S., we have over 100 million people that watch YouTube and YouTube TV on their TV screens each month. YouTube helps advertisers reach general audiences they can't reach anywhere else. We talked about it. YouTube reaches more 18- to 49-year-olds than all linear TV networks combined. And so there is an opportunity, a big opportunity, for YouTube to help brands and agencies really more easily connect with this audience. And we're very invested in this space. And just to give you a few examples, in the second half of last year, we launched YouTube Masthead on TV screens to help advertisers drive awareness with large audiences in basically a single moment. Many are taking advantage of it
  • Operator:
    And our next question comes from Michael Nathanson from MoffettNathanson.
  • Michael Nathanson:
    Philipp, I was following up on Colin's question just perfectly. I wanted to understand the framework, if you could, and think about the bigger opportunity longer term and priority highs -- priority is in streaming video, right? So are you happy with the progress of YouTube TV so far? Will you expand into other countries? And can you contrast that versus the opportunity you see in connected TVs and devices as you've done for Google TV or Chromecast? And then is there a perceived added value from advertisers for this type of inventory? Does it attract a new type of advertiser to offer YouTube TV inventory or connected TV inventory from the traditional YouTube advertising?
  • Sundar Pichai:
    Yes, maybe I'll comment on -- one of the things which has worked well for Google over the years is we really try to reach users where they are, and that's how Google has worked always. We've invested across platforms, across devices, across countries. And I think the same applies for the YouTube experience. We want to bring it to the screen that's most convenient for users and, hence, our investments in Google TV, Chromecast, YouTube TV as a whole itself. And I think we are taking a long-term view here, obviously focused on the user experience and really getting it all to work well. We know -- while smartphones are at the center for YouTube, TV is an important form factor. And over time, people will use it across multiple screens. And so that's the experience we are focused on. And any time we create that experience, we know, over time, there is value to be captured commercially as well that makes sense for advertisers, but we take a long-term view.
  • Philipp Schindler:
    Yes. And I talked about the connected TV part already. Maybe briefly just on YouTube TV, YouTube TV continues to gain momentum. Our advertising efforts on YouTube TV itself are still very, very early. But we think there is an opportunity to apply some of our targeting and measurement capabilities to really provide a better user and advertiser experience over time. And yes, we heard from customers, they have a very strong interest in advertising and streaming environments. I mentioned how we combine it in the single lineups. So that's an interesting path going forward.
  • Operator:
    And our next question comes from Stephen Ju from Crédit Suisse.
  • Stephen Ju:
    So Sundar, I think let's -- I think you've recently talked about a 10- to 20-year journey for AI and quantum computing to unlock new use cases. I think you brought up in the past some of the ways AI is helping you with the products that you have in market right now. But as we take a more longer-term look into the future, what do you think some of the new applications could be? And I think, Philipp, it might have been a few years ago when you were speaking at an investor conference, and you called out the desire to onboard and help SMBs, particularly as they really had no way to advertise before. And Google, and online in general, presented a golden opportunity to really help them grow their business. So where do you think you are in terms of putting together an easy-to-use set of tools to help those who otherwise don't really have agency representation so that they can reach all the different customers that they should be reaching across all of the different services that you're offering?
  • Sundar Pichai:
    Thanks, Stephen. I'll answer the AI part first. We've always wanted to be foundational in how we approach technological advances, and that's the core competency. We invest across the company. We're one of the largest R&D investors in the world. And obviously, AI is a big part of it. Just I'm really excited that we -- over the past few years, while we have made progress in understanding different modalities, be it text, images, voice, vision, et cetera, there is -- we definitely -- I think we are at an inflection point, and we are investing to build better models and deepen our understanding and do it in a more generalized way. And when we do that, it will apply horizontally across our products. You saw a version of that when we shipped Bird in Search in what was one of our biggest quality improvements, but you'll see that flow across be it Google Search, YouTube, Android as well as our investments in Alphabet, be it self-driving cars or robotics. So we take that view and, definitely, we want to make sure we are driving state-of-the-art progress. Philipp?
  • Philipp Schindler:
    Yes. So first, let me recognize, I mean it has obviously been a very, very challenging environment for SMBs. Many weren't online. Many lost line of sight to demand overnight due to COVID. So around this time last year, as soon as we saw the scale of the impact, we really accelerated product that give our customers, and especially our SMB customers, signals to help them actually navigate and pivot. And as I noted earlier, as more consumers moved online and advertisers obviously responded by reactivating spend, we also saw our advertiser base grow, particularly the number of smaller advertisers or SMBs, and we're helping them see shift in supply and demand not just across sectors but actually within sectors. For example, travel continues to get hit hard, hit pretty hard. And after the initial lockdown last year, searches for vacation homes and near-me rentals saw huge spikes, and that continues to fluctuate. On the other hand, if we look at retail, demand isn't disappearing. It's shifting in many cases. We're seeing increases in searches for things like gym equipment, crafts, patio heaters and so on, anything related to outdoor activity and so on. We're obviously thinking about how to help SMBs on products like Maps. Like, over the last 5 years, we've made more than 1,000 improvements to business profiles, making it a lot easier for merchants to connect with customers and especially now into the crisis. In 2020, we added new features to, for example, provide COVID updates, service changes and new attributes like takeout, delivery, curbside pickup, now all easily available for consumers on Maps to connect them to their favorite SMBs, so a really incredible investment, frankly, from our side, and I think it's very well received.
  • 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 look forward to speaking with you again on our first quarter 2021 call. Thank you, and have a good evening.
  • Operator:
    Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.