Q4 2019 Earnings Call

The Netflix Q4, 2019 earnings interview I'm sensor long VP of IR and corporate development joining me today, our CEO Reed Hastings CFO since Newman Chief content Officer Test surrenders, and Chief product Officer, Greg Peters, our interview or this quarter is Mike Morris with Guggenheim as a reminder, we'll be making forward looking statements and actual results may vary with that let me turn it over to Mike.

Now for its first question.

Great. Thank you Spencer and good afternoon before we dive into some of the details are provided in this quarter's letter I'd love to have read provide some strategic thoughts as we head into the new year, the new decade on perhaps we can start with just what were the most important strategic accomplishments in your mind of 29 team and as you look forward what do you hope to accomplish this year.

You know we've had the same strategy basically for 20 years, which is please our members and they help us grow and we've done that in a variety of ways of course initially just was DVD by mail them the combination.

And if you look at what we've done and expanding film and making that a really strong aspect of Netflix.

Had a lot of continuous progress.

But thats the same strategy, we've always done how do we learn how to please our members whether that's on the product side marketing side or content side and the next decade, we anticipate the same how do we use the great resources that we have to do even better.

Now, let's talk a little bit about some of the key specifics from the letter today. The first of course is the guidance on your member growth for the coming quarter on we are very strong fourth quarter compared to your guide the first quarter is lighter than it was in the prior year you talked about some of the potential for timing between the first and second quarter I think the key quest.

And on investors' minds is how to think about the full year 2019 looked very similar to 2018 with the strong fourth quarter, how should we think about about the coming year.

In that regard.

I mean, you take this month sure will take us on Mike So and your first say, Mike our opportunity we view our opportunity our long term opportunity as big an unchanged. So we should be clear about that we're not providing full year guidance, but when you think about Q1.

Again, it's comping off of the all time biggest quarter, we've ever had in Q1 of last year.

We guided to 7 million paid net adds in 2020. So when you look at that Q1 2020 number of 7 million, that's still big growth that we've only had four quarters in our history, we've grown more than 7 million in paid net ads.

And the number specifically it reflects first there is primarily a U.S. story, there and that we we have seen and we talked about in the letter some elevated churn in the U.S. from combination of pricing and competition.

We've we've kind of rolled that through into Q1, including a full quarter of competition in Q1 versus a partial quarter. In Q4, we also anticipate that competition rolling out globally throughout the year. So we're trying to be prudent, but thinking about that impact throughout throughout the business and then when we talked about as well as when we think about the seasonality that arc between.

In Q1 in Q2 of the first half of the year, we think it's likely to be more balanced views of the timing of the pricing changes we took that rolled through Q2 of 2019. So we think that our seasonality is going to look more like 2018 in 2019, we think about the first half of the year.

Okay, and when we talk about competition, you've mentioned churn a couple of times with respect to the potential impact can you talk about competition on both our gross adds and engagement as well.

Especially on engagement I know, it's early but they but clearly the Disney plus product has a very heavy kids and family focus to it have you seen any specific engagement change on your content in that John .

Sure well, Hey, I'll jump in other others can we actually alluded to this end in the letter Mike. The Great thing is first off we're growing in Q4, including in the U.S., even with some of this noise from competitive launches and ultimately what drives our business is increasing member satisfaction in viewing and what you'll see us when we saw across the.

The board has that are viewing our per membership viewing grew not just globally, but in the U.S. through Q4 and continues so that bodes well for our long term opportunity. So long as we keep getting better and my thinking at the Disney product is the plus has a lot at great catalog product and one big New show Manta Lorien and at times.

Narrowly is going to take away from linear TV.

And takes away a little bit from us but.

Again, most of the growth in the future is coming out of linear TV.

Draws down by a variety of people because there was so broadly distributed prior to the launch.

Okay, and I guess the last thing on this particular topic is to behavior outside the U.S. as compared to the end side clearly within the U.S. and more mature market and Thats, where the products. We're primarily focused in the fourth quarter. There launches. We do have some more expanded international rollout, particularly Disney talked about Tom were announced a broader European rollout at the end of the first quarter.

Any thoughts specific of that is that factored in is it one of many things what's your thought there.

One of many I mean, Disney is going to be a global service.

Quite quickly.

And there are many other global services remember that we compete a lot for time with you too.

And it's not dollars because that supported but we compete very broadly for viewing and as Vince mentioned are viewing on a per member basis is up and.

And that's because our content is getting better our service is getting better and thats all coming out of linear TV.

Now I'd say that their their brands are definitely global brands, but their nose with the exception of China theyre not more popular than than they are in the U.S. anywhere else in the world.

Okay and so.

So Greg a question on on pricing right. When we spoke last quarter you felt to be competitive launches would not have an impact on your price and so I guess the first question is now that you have this quarter under your belt and any update on that on that point in particular, yes, I think it's useful to start with.

Just noticing that our revenue in the United States is up 23% year over year in Q4, So we're still seeing pretty significant growth there and we're not seeing anything that fundamentally contradicts our core model or suggests that it's changed in a material way.

That model is if we do a good job of judiciously investing the money that our members give us every month and great stories and better product experience is creating more value for them. Then we occasionally earn the ability to come back to them and asked them for a little bit more money to keep that virtuous cycle of improvements going and everything.

We're seeing continues to support that core miles intact. So that's our job.

Okay, Great and go down that path a little bit further.

Historically, you have done some sizable price increases at least on a percentage basis on a somewhat spread out.

Timeframe, how do you think about possibly doing perhaps a single annual price increase in a more mature market at a more modest rate I hate to say this but maybe somewhat more similar to what people have experienced with their cable bill or something to that effect.

We don't have a fixed model that RPR were coming in and saying. This is the right approach. So I think our job is actually listen to our members give us the signals that theyre, giving us in terms of engagement there, we're seeing that engagement growth.

You heard we're going after and will really use that as a mechanism to guide us towards whenever we earned that opportunity to come back and ask for more so we're not really coming in with just a fixed model that that we're going to shift you or anything like that.

And if we are putting hits on the board and we could see that in the terms of watching an engagement and subscriber growth and.

Growth and as I guys around our projects than the more of the more you can do that's more frequently you can go back. So we have to Weve, where in this great model, where we have to prove ourselves to our members literally every month. So it's a really does hold us to a very high bar and just coming back into a more and topping ourselves if we need to.

One last question on this is around premium plan subscribers versus your standard plan subscribers, which largest you've mentioned to pass clearly the largest group what has been the trend with respect to your subscribers moving to the premium plan and is there.

Away to further incentivize them to almost have a self opted price increase for also clearly getting a new and improved product as well.

I think were again constantly evaluating the right balance of what's what features what prices at those various different tiers, but we havent seen a significant shift in that and we see a healthy take rate across all of our plan options, which is a really good sign I think that we're providing a range of options at a range of price point.

Paints that allow.

Consumers in the markets that we serve to sort of select into the right model again, we want to be innovative about that and we'll look for ways to create more value across all of our cheers.

Right now that that blend is pretty healthy we think.

Mike I would just in terms of planned mix you have over the years seem a slight migration towards the higher price point plans I did that is something that we have seen but it's quite gradual so theres no sort of big jump in any sort of given quarter, but quite a gradual increase in that which I think maps to the growth in in smart Tvs and high definition degrees.

Right.

Okay, I'd like to switch to a few questions on content and content strategy.

So Ted the ramp in feature film product in particular, both development release Big step forward for you in 2019 as you look into 2020.

What are you most excited about either from a content perspective or an overall thematic perspective, there was that there was a.

Healthy amount of information on some key titles inhibitor, but what would we appreciate you highlighting the things that have most important to you well looking forward to next year, we get the opportunity to do some things that we know have worked and come back with some sequels and our Super popular why Asia Monros. We've got these romp comes to avoid that level four in getting good coming back the sequel.

As in Q1 in Q2.

Big Big ticket action films with Mark Wahlberg in Charlie's Darren Chris Hens, whereas more like the you've seen coming in Q4 and trying to program. Our movies like we do our series where every case every mood every region of the world. So it's not trying to make one size fits all programming. That's what we have so much of it just what as we all.

On a whole that also a very high entertainment bar, so you're going to see us working across all geographies like we did in Q4 and still continuing to kind of press up the production quality the production investment in these ops.

And those were all coming out in Q on Q2, this year and some in Q3 Q4 of them just got a tremendous late this year.

And I think is done in the one thing we've been putting on the letter as you know it's exciting that we end up with the being the most nominated studio the Oscars This year with our films, but the most excited they are those films are all incredibly popular their members as well.

So that leads into another question, which is as you have sort of shifted and increased this focus on film Ted in particularly you've highlighted a couple of reasons for that and benefits of members of included some comparison with respect to the value proposition right. You can compare to Q movie ticket cost. So sure exactly I think we've also talked about.

The ability for film content to travel there is sort of a perhaps a broader global base of interest.

Anything else that you would highlight or remind us up for why this shift in investment or maybe not shift but expansion is important and also now we have another year or under our belt with a pretty robust slate. So have things been progressing as you would have expected given those objectives, yes, I'd say look the when I look back.

The Q4, I look back say I'm glad we decided to do this see about a year and a half ago. That's about the time it takes to secure the deals that obviously due to production and goes get through post and get everything delivered at the level of quality that we were able to.

And so now we have all of that kind of ramp up behind us and well have a steady flow of projects like youd like you've seen in Q4.

Similarly, with it with feature animation.

What I see what we're at today with access to programming and all those other issues, we've been ramping up our future innovation for almost three years and really hit the ground. There first project with Klaus in Q4, there was a complete audience laser and Oscar nominated for best animated feature.

And that will keep the steady drumbeat going there as well in Q2, we have animated feature called the will of these into Q4, we have over the Moon, which is a firm Glenn team that.

Little Mermaid and beauty in the Beast. So these are big theatrical scale animated features and big scale feature films that would be competitive with anything you'd see in the box office and I think people really do value when they tend to your point they do travel much more predictably than TV series do.

One of the things you just mentioned and clearly has been very widely reported in scene is the critical acclaim that you've achieved and you've had growth in golden globes.

Now at this point Oscar nominations.

My question is around the business benefit of that and the cost of achieving it as well.

Maybe.

It's a somewhat open ended question, but but how how much is it costing you at this point to have those films in a place that they can be considered for that and what does the timeframe for the benefit to the business look like for that what are you seeing the expansion. This last year within the confines of our existing kind of content budget. So.

We are growing it's how we're choosing to bring the incremental spending to the table.

In terms of the bigger breadth of scale breadth and scale of films.

But not taking away from our growth in series, which is also growing and particularly in our local language series, which we reported before but we're growing by 130 seasons local language areas around the world as well so to me I look at it as reviewed the growth to benefit to the business is the growth that you're saying.

I would just add to that so.

Yes.

You'll see that if we further our reputation for doing well for content.

Sorry for talent by being one of the best in the World at winning awards for our talent.

Then the business benefit is that we will win deals that we wouldnt otherwise one for incredibly entertaining content. So think of all of our awards work as that really smart way to make us the best Hoover talents in the World and I think it's also worth noting that theres a consumer component is too I mean, some of our members around the world use the awards pieces.

As a sign of what they want to watch so that when we present those that information to them, we actually see them respond to that so theres an immediate benefit there as well and that is when we decide that there is a typically there seems to be a big gap between.

Critical acclaim and award winning and popular and we are really trying to do and we have in the best quarter achieve both meaning we are bringing popular film to the market at such a high quality. This also being recognized by the critics and by the awards recruits sorry, Mike I just want to chime in just to that point it is working.

Already the model's working in terms of seeing the return to our business I mean, it that programming at that level of diversity and quality across such a broad member base. Ultimately is driving member satisfaction, it's growing our member base. It's growing our revenues have you seen roughly 30% revenue growth. This year, we're growing our profits.

Both our profit margin and up to 2.6 billion of operating profit. This year, we're we're delivering on our cash flow objectives, including on a path to improve our cash flow profile next years you saw in the letter material improvement from negative 3.3 billion. This year to roughly negative two and half billion next year on that path to cash flow positive over over the coming years.

So you're seeing it play out in the business model already.

It to that point fence by my next question free was really around your cash investment on.

Im content in the coming year.

Can you share a specific in terms of of the growth through you're anticipating there and also can you help us with the modeling side, which is the amortization of that content the relationship between that amortization in the cash investment.

Yes, sure so well continue to increase our content investment across the board next year, because as I. Just said, we're seeing a great return on that in terms of our business model.

Our content am or is just a little under $10 billion. This past year in 2019.

You should expect to see without specific guidance.

Similar level of growth in that kind of.

You accrue I'd say roughly in that 20% range. This past year and you should assume will continue invest said at those types of levels. This year, the conversion or the relationship between our cash spend and are on our amortization that ratio was about 1.6, meaning 1.6.

Times, the the cash investment relative to our amortization is about $15 billion of cash investment this past year in 2019.

You should see that ratio continue come down a little bit again without a specific number but we're scaling into the business. So we've we've moved a long way in this business model transition from what was once a in all license content business to now the well over 50% of our cash spend is on originals. The future of our business is mostly originals and we've.

Very much transition there so that puts less less.

Yeah sort of pressure on our working capital so thats playing out in the numbers as well so similar growth rate in amortization, but but it's getting closer in terms of our cash versus.

And and you're seeing that in terms of the improvement in the cash flow trajectory next year.

I'm sure you realize it but it is a huge milestone in our growth.

Last year being peak negative free cash flow.

And so we're on the glide path slowly towards positive free cash flow now, we're excited about that but thats not coming from shrinking back our content spending that's coming from the increase in revenue and operating income.

Great. So, let's pull it back a little bit and talked about some of the.

Couple of additional content issues or topics if you will.

Friends.

Big title.

I believe one of your more popular titles came off the service at the end of 2019 I realize we're only three weeks and but you do see the data real time has.

This content being moved off the platform impacted your consumer engagement your member engagement at all.

Nothing that we see interconnector.

Okay.

So, let's also talked about viewership than a couple of things I had a question here and then you gave us.

Our page of viewership metrics.

As you probably put a little more color on that simple then shortages as just to say we've had over the years incredible popular product come on and off the service and expires and typically what happens is our members through our incredible personalization deep librarian broad library are able to find their next average up and Thats the will happen with the with friends with rent fans and.

So minimal find it elsewhere. It has a minimal fights of their next Everett Joe.

Like Mike It's about 10 years ago, we dropped we had to drop all the Disney content not phased out like we are but also we added to the stars deal.

And we were all worried about the big impact is instead people pay back the magic that the personalized service and they're able to find other things to watch and viewing growth just kept rising yes.

And that phenomenon over and over again, even in the one that may have been even more dramatic than that was it the all the Nickelodeon content when it came up.

And was completely displaced by other kids watching overnight.

I should say all equally good content just be what the ability to find something new.

Sure.

Understood and so.

Within that what I was coming to is the viewership metrics that you provided and the letter for a number of your programs.

I'd be curious if you wanted to highlight something that stood out to you, but I'll tell you something that stood out to me.

The information you provided around about the crown. Okay. So in particular season, three saw growth and early season viewing and yet it's still I think on the metric 21 million households through the first four weeks a season three compared to 73 million households worldwide for the series overall and I guess, what strikes me is that.

There you are members have enough content that even though that was important to 73 million.

And 21 million was a big step so so 52 million yet to watch it so correct, but that measure would that first 28 days doesn't capture also are things like brand new viewers. The season, one that just started in the ramp up the season three the shows an incredibly durable in the UK, the U.S. and around the world.

How I.

How does that compared to other key shows right I understand that every show doesn't behave like the crown, but is that viewership pattern.

Something that.

Somewhat similar for a show like let's say stranger things that has three seasons and so unique sometimes the show enter the zeit guys in such a loud way.

Like Stranger things season, Threeg around the fourth of July phenomenon, everything that happened that a lot of that view it out of that viewing pops like that.

Something similar we saw with a huge launch for which are which were which was kind of pent up demand for known IP.

But man the show delivered for people and delivered viewing hours for US people love that ran out of the gate other shows going to come out and they pop in their dependable and they build and people are going to watch it as soon as they finished where they're watching right. Now so it's very different from Joe to show I think you can see that and that list of other shows over warm and sometimes that's a really great indicator of its full year performance.

And sometimes it just shows will continue to build on their positive word of mouth that become even bigger overtime.

I'd like to.

After a couple questions about product and distribution, so Greg I'd like to come back to the topic of pricing, we spoke a little bit about the U.S., but.

You have expanded your mobile only plans I believe during the quarter.

Can you talk about.

Where where that is now.

I think its India, Indonesia, I believe Malaysia, but maybe the balance between what has become a more permanent part of your offering what's still being tested and how we should think about that mix going forward, yes, you've got the three countries correct and we've seen in the performance across those three countries is that.

Because we've added this this price at a lower price point, just you're at a lower price point, we've been able to add incremental subscribers, which is great. We see an increase in retention not only in mobile plan, but in other plans as well and net that's a revenue positive action for us and so we're super excited about that.

We think that that's a pretty good indicator that there might be other countries around the world where that kind of offering will work as well. So we're going to continue to test both that in different countries and see how that goes. We're also got a bunch of different other approaches that we're going to try out and won't really trying to be active in innovative in that area to try and improve the accessibility of the.

The service for more and more people around the world, but in a way, which we think as long term revenue optimizing as well.

Can you expand on on I'm, not as well in terms of expanding that availability.

I mean really I'd say that anticipate that we'll do more testing of the mobile plan in more territories as probably the one to talk about at this point, then we'll sort of see what else works out through our testing as we go.

Okay, Great and then over the weekend I believe I believe it came out on Sunday expanded I think you as referred to as you've been strengthened partnership with Sky.

How.

How does that become a stronger partnership I think what we are seeing is there's more and more opportunity that we're finding through.

Whether it's on mobile operators pay TV operators I Sps.

To reach out to a customer segments that while we're probably growing with an in general we can actually accelerate that growth and so you know it starts by being available on the set top boxes. The device that they are using a watch TV and we can put Netflix there and make it easy to.

See the service and potentially sign up there, but increasingly now with bundles, we've removed yet another point of friction. So thats just part of their offering and they can just you can do a call to action like right in front of them like a stranger things, it's launching right now watch and that's a very effective way to introduce people to the sort of it but also we're finding now with co marketing programs and other things.

Are getting more sophisticated that we can actually do more effective job at reaching out to more.

Those members to be around the world.

You brought up the topic of bundling to kind of questions with respect to bundling or or different pricing packages are the first is a question of the need for consumers for this re aggregation of these multiple services and if that is the case, perhaps a third party would like to or should be taking some portion of the payment for adding value.

I guess my question is your position on the need for for some sort of aggregation of these multiple services. My second question is around annual pricing versus monthly pricing and perhaps a discount for consumers, who who choose to take an annual plan.

Neither of those how to either of those factor into your thoughts here, Yeah, I think we'll see sort of whats the right solution is for consumers as we shift to this online streaming world and anticipate that there are models that makes sense, where they'll will bundle multiple content services together and make it more sort of easier for consumers to access.

And that might be the effect that we're seeing really most of the bundles that we have our either connecting to an existing pay TV sort of legacy pay TV service or there are connecting to things like your mobile plan or your Internet plan. So I think theres multiple different opportunities to find the right mix, where we're able to introduce Netflix is part of our.

Set of offerings that just make it simple for people to sign up and it's logical in its intuitive for them.

To go do so.

And that the likely there. So we have your favorite Joe you are for your favorite movie raises the chances that you're going to figure out to get to us as well.

That's right and then you also you mentioned I think an annual a question on an annual that's right. Yes. So I think you know, it's it's an interesting model and certainly we see some theirs on legacy plans are sort of.

Some instances that there are certain countries around the world, where thats a more common standard right. So yes, we want to experiment that and test that out and understand if thats a more effective way for our members to access us. So we'll we'll go do that and we'll sort I hear from them, but thats something thats more effective or not we don't know yet.

Okay, I'd like to revisit the topic of advertising as a source of revenue were a means for your members to pay you for access to the service.

Remind us we talk about a lot every quarter the topic comes up again, so remind us why.

Advertising is not a REIT option given that you do have a focus on providing your members with some optionality in terms of their way to enjoy the service.

Yeah, Mike I think we address this last quarter in the letter, but I'll go over to again, which is Google and Facebook and Amazon are tremendously powerful online advertising because they're integrating so much data from silver resources, and there's a business that but it's a mixed advertising.

Our targeted in effective.

So I think those three are going to get most of the online advertising business and then to grow five or 10 billion dollar advertising business you have to rent that away from other advertisers in this case say.

Or other providers.

Amazon, Google and Facebook, which is quite challenging.

So don't think of that as in a long term there is not easy money there and instead, we think if we don't have exposure to that positive side is where much safer place.

We're not integrating everybody's data were not controversial that way, we've got a much simpler business model, which is just focused on streaming and customer pleasure. So we think with our model that we will actually get to a larger revenue larger profits larger market cap because we don't have the exposure to something that we're strategically disadvantage.

That stat, which is online advertising against those big three which over the next 10 years or just can integrate incredible amounts of data about everybody that we won't we're not trying to have access to so that's why we're really pretty confident the best business model is this way certainly in the long term.

I do think that that last point is something we do hear people lose sight of sometimes which as you are not aggregating.

It's amount of data about your viewers you have viewership habits, but but beyond that I think I think correct me if I'm wrong, you don't collect a significant amount of personal data that will be used to target advertising is that accurate. We don't collect anything we're really focused on just making our members happy. So we're not tied up with all that controversy around advertising and.

Again, if you wanted to succeed in online advertising you can't just have a little data.

To keep up with those Giants that has been very heavily on that.

And track locations and all kinds of other things that we're not interested in doing so we want to be the safe Respighi, where you can explore you can get stimulated have fun enjoy relax and that none of the controversy.

Around excluding users with advertising.

Now one of the biggest changes that you guys have made in a while with respect to what you share with us as the geographic breakdown that you are providing now with respect your actual so maybe just briefly can you remind us the reason that you made this change.

We have had some questions whether it was somewhat.

Suggested a required a view on so why did you make the change and then I do have a couple of specific questions about about the markets.

Spencer you want to handle that sure so to answer questions like that this was not a require change. This was a change that we made and as we talked about it was too we always evolve our view of our businesses our business changes in with our launch of rest of the work in 2016 were basically fully global company ex China. So we have increased.

We've been looking at the business internally along these four regions. So we want to map our external reporting.

And align it with how we look at it internally so it wasn't a requirement that our choice.

So we work hard internally to not be us in international.

Theres no such thing as international Theres, a bunch of do wants of every market around the world and part of our development from and originally just domestic companies to lose those kinds of distinction and instead think of it as board equal regions and we're growing all of them and were sophisticated about all of them and that's why we look at.

In that four region way internally, which is of course drives the external reporting.

Okay, great internal disciplined everybody to think about the business more that way for sure.

Well, that's a great segway into some questions specifically about the nuances in these regions, perhaps we can start with Latin America, which was your first.

Broad international launch in 2011, and so what we what we noticed and of course this quarter you had record a member growth in each of the regions, but it does look like Latin America is perhaps closer to being mature with respect to its growth trajectory at the same time, we would look at the data and say, it's still the penetration level of broadband households is still very.

Low in that region can you characterize for US where you think we are and the lifecycle of member growth in that region.

Spend to want to think that yes sure.

I would say across the board, we're still early days right. So even with the the roughly 167 million members.

Across the globe and and Big membership in Latin America, you can see what we're we're still roughly kind of in that 30% penetration, we think as pay TV households, you've seen.

Around where whether its ptv your broadband households, we don't see why we can get into all of those households over time.

So yes were a bit more mature in Latin America than perhaps we are in APAC and and some specific countries, but we're continuing to grow it happens to be region were similar to the U.S. our price increases were a bit more significant than in other parts of the world. So I think that may have been a bit of a headwind as well we had foreign exchange working against us more meaningfully to.

Erica, but I'd say in general very long runway, we continue continue to see.

Global content and local content working really well in that region. So what will.

I think I think you'll see continued healthy growth on the horizon.

And then you just since you just mentioned a pack and Theres a couple of questions. Here. One is because this region has both Australia New Zealand, so larger English speaking markets.

And and a large emerging market population. The first question is can you share at all that sort of balance of subscriptions in that market between those two and and I would think there's still a relatively high ASP, either which would which would imply some mix to higher priced markets.

But first the mix there and then also should we expect that ASP to come down based on what you're seeing now with respect to adoption of the lower price mobile plant.

In terms of the mix and others can jump in as well, but we don't break it down specifically by country I think your takeaway should be there we're seeing healthy growth in all of these markets. So across Japan Korea, India. I mean, all of these markets were increasing that content market fit for getting much smarter about the markets in both the as this.

The content, we offer as well as the pricing and packaging bundling and distribution to our members and payment methods for members. So I think we're getting better literally every quarter every year and that's playing out in terms of very healthy growth across those markets and then with respect to pricing certainly that pricing is different in every country around the world, but we don't we're not.

Managing to ARPU, we're managing to revenue maximization as we as we've talked about earlier so.

We're not going to provide a long term focus obviously as we have lower priced mobile offers that's going to bring down a blended ARPU in a country or in a market, but if we're doing that in a revenue accretive way, we think thats great for a long term business, we're growing subscribers and we're growing revenue.

And our our local content our original content in Japan, and Korea by way of example, becoming much more sophisticated about what is super impactful in those countries plays Pan regionally and occasionally plays globally. So those those investments are being up in some form of things like the naked director, which was a big big hit for Us in Japan and.

Kingdom, which is the second season coming up better Korea, that's been a big global hit for US as you think about the exciting things that happened in the content space movie like parasite coming out of Korea, they've done a 100 140 million globally 100 made in Korea, and about 40 million outside and that the expansion of people finding stories from around the world.

It's going to go only make the opportunity bigger and bigger.

Let me have Tempur I wonder two more questions. Please okay. Let me hit on EMEA, and then and then I'll get a wrap of question our thinking in that European Middle Eastern Africa market. It's somewhat similar in terms of some mature markets and some on some emerging markets and opportunities. There. So as you think about that that market growth opportunity is the answer similar to this.

Same as the question about Asia and I think the question is a little bit rooted and we do have some specific mobile only lower price plans and Asia that we've been focused on but should we think about that EMEA markets as perhaps following a similar pattern.

Craig you want to take the pricing I would say in terms of it the opportunity we see a huge opportunity in EMEA. It's it's a multiple of the number of addressable their pay TV or broadband households, as you see for example in the UK enter us in Canada region were less than 20% penetrating the market you've seen its driving more than 50%.

Of our paid member additions in recent quarters were roughly 50% so.

Were low penetrated and we're growing in a very healthy clip in that market I'll turn to Greg, though in terms of pricing strategy and their pricing and plans approach now again that.

Region much like a pack has both are very affluent very mature markets as well as less affluent markets and so I anticipate that will find is that we'll have a mix of plans and approaches.

That will spread across that region that again will be different price points, but it will be looking to sort of maximize revenue through that mix across the entire region.

Great. So I'd like to conclude again as we did last time with a little bit of five for one question I last quarter, we talked about each of viewer.

Or.

Something each of you was excited about in the coming for this time I'd like to ask you press analyst reports et cetera about your company I'd Love to hear your take on what you think is.

Most misunderstood about the company or or at least well appreciated about the company.

So last as with last quarter, I'll start with us Spencer and and go from there.

Sure I honestly don't think that theres not much sense misunderstood were single product company and I think pretty straightforward I think from US investors understand I think I'd like to think about one thing I personally think theres probably a bit.

Been over focus on the streaming worse with a notion and I know, it's exciting for folks to talk about the clashes tightened and all that kind of stuff, but I think really the big thing that's going on is this transition from one year entertainment to streaming on demand entertainment, which is really really big in very similar transition the industry went through from broadcast and cable and there are.

What you saw was a lot of new cable networks, Didnt really take much share from each other but really we together.

Yes, as broadcasting sort of.

Became smaller overtime I think that's what's what's really the big thing that is happening that's probably less well understood.

Thanks, Thats, what about you sense.

And then you're going to pick up because I got the order wrong last quarter.

Okay.

Yes, I'll say I think was most misunderstood as the is the business model and what you've seen our cash flow generally and folks thinking that we are losing money. If you will win we well we've shown as there were increasing our profitability, both growing and growing our profit margins and what you've seen over the last few years is for.

Forward investment as we've been going through a really kind of pretty significant transition of our business model from license content or you you pay basically ratably for content you receive or the time that it's on the network to original content not just license originals, but let's sell produced originals, where oftentimes we're investing many years before.

Our that content on the service and we moved as they say well along the curve there where the bulk of our cash spend is now on original content. So as we've gotten bigger as we move towards originals.

Just a fundamentally changes that cash flow profile over time and were very profitable business and one that will ultimately.

Over the years become meaningfully self funding.

Thanks, Spencer, Greg how about you add spends actually took mine. It's my favorite gap between external and internal worldview. So I'm very excited to be turning the corner on the free cash flow issues. So that we could sort of put that behind us and really focus on growing the business Ed.

Great and Ted.

In terms of misunderstood I think I'd. These this notion you hear every once in awhile of where there's so much stuff on Netflix everything gets lost and I think thats. The opposite is true, which you'll see in that the in those numbers that we release you in the letter.

The the low our ability to launch new brands that sustained brands that were multiple seasons or multiple sequels and at this at very high volume from all over the world has been unparalleled and the other we can create brands out of finnair over and over again, sometimes multiple times a week like this past week.

It's something that I'm Super proud of and I think it gets lots of people because they think all this content for them. It isn't it's just meant to be your favorite show and your favorite movie and that's going to be something for everybody.

And for me, it's really the we keep doing these amazing numbers you know doing eight aid in Q4 is just amazing.

So happy with that and with some which are performance. You know ended the year high note of a massive new franchise that will develop season. After season. So if you think about the next couple of years, it's really the rate of improvement that's the big thing how much we're learning and we're doing so many shows our learning as higher doing so many product test.

Our learning is higher and the quality of our service two or three years from now what we saw much higher than it is today.

That's the thing that's not well understood everyone focuses on how's the current service look as opposed to how good regularity in three years.

Thank you, Mike great job and.

Look forward and talking with all of our investors and everyone over the quarter.

Good afternoon, and welcome to Netflix Q3, 2018 earnings interview I Am Spencer Wang VP of.

They are in corporate development, joining me today, our CEO Reed Hastings CFO , David Wells, Chief content officer tests around us and Chief product Officer, Greg Peters are heavier this quarter is Eric Sheridan from CBS . As a reminder, we will be making forward looking statements and actual results may vary with that over to you know Eric for the first question.

Thank you Spencer, maybe I'll kick off with what clearly is as the headline from the earnings results much better subscriber performance in Q3, and a fairly robust guide within Q4 in terms of looking out over subscribers over to you guys just relay out. The framework you saw developed in Q3, what do you think might develop in Q4 that was different.

And what happened earlier in the.

You know, Eric I think were getting a little better on the forecasting a particular the evolution to paid net adds. So if you look at that paid net add growth that we showed you can see how remarkably steady. So I'm afraid that Q2 Q3 story is probably mostly an issue of forecasting as opposed to anything changing in the business and you can see the noise.

Is that the free trials added into the paid which gets you. The total creates so I think by focusing going forward on paid we'll be able to be a little more accurate focus on the fundamentals.

So when you think about some of the distribution deals you've done over the last couple of years, that's creating some noise that I think you're now trying to clear up with these new disclosures, but can you also talk a little bit, but what those distribution deals maybe in terms of opening up pockets of the market that haven't been available to you before.

Not only just this year, but as you think out longer term about the business.

So over to you, Greg and can you clarify Eric and distribution deals you mean, the device partners et cetera.

Correct different ways of going to market via partner as opposed to direct yes, I think what we're doing is we're slowly learning more and more about how we can leverage partners. We've seen it sort of an evolution from just doing device integrations into things like billing integrations, we can make it that much easier for our members to sign up for the service. This latest round, we're seeing now is bundling.

Where weather or bundling with an internet service provider or mobile operator, our ptv operator, we can make it even easier for people to just fine Netflix and to try the service out and what we're seeing here is that.

This allows us to access set of subscribers, a consumer demographic, which might be less technology early adopter than the folks that are signing us up with us directly and so we're able to sort of accelerate our growth and new segment via these deal. So we're learning more and more about that we're trying to figure out which markets they work and how to optimize that bundle strategy.

Eric I would say these are new disclosures in the sense. If that's pretty strong term I would say this is an evolution of a partner strategy and as Greg talked about we've been doing many of these for a while.

There is nothing sort of strategically different than than what we've been doing for the last five years or five years or so.

So maybe following up on something that Gregg said, there just where you are discovering growth and awareness of the product that didnt exist before I'd like to separate that into domestic versus international I think one of the questions. We get from investors all the time or where is the growth coming from in North America.

Given the brands awareness that given how long the brand has been around in the marketplace anything you could tell us about where those pockets of growth are and where you are discovering new awareness for the company.

I'd say, even in America, where they awareness of Super High end. The brand is well understood, yes, theres still pockets consumers, who it's harder for them to get the activation energy to go directly to the web site and signed up but if we can actually put Netflix application a call to action and maybe even bundle you know that the.

Option as part of their pay TV operators offering or that the mobile offering. They can just click on something and then get right into the service and so even for a place where we are well known.

We make it easier more effective for folks to sign up we see actual.

Acceleration of ads. There then obviously in markets, where we are less well.

Understood interpret the offering is that simplifying that making it less friction full provides other types of members maybe that are even more technology adopters simple ways just to try to experience out and we get growth there as well so I wouldn't say it but we're seeing sort of the same dynamic which as you remove friction and it works both in Hypothet train high awareness.

Cuts as well as and lower penetration lower awareness markets.

One of the other thing sticking with the domestic market per minute pricing power in the business model you raised prices as we came out of last year in into this year. It's now been a couple of quarters as some of those pricing actions have worked through the marketplace. What have you learned about the value to consumers put on Netflix and how much pricing power there might be in the business model spin.

When you look domestically I think we're just what we're seeing is just reinforcing this sort of core theory that we have which is our job is to focus on invest in providing our members incredible experiences more great content, great product experiences and when we do that and we do it well we earn the right to increase price.

A bit and then take that new revenue invested back into the model and that sort of continuous positive cycle, we get to keep going and we foresee that that will keep going for many years in the future.

Maybe pivoting back to international I'd Love to talk about both India and non India within India. We saw a big push earlier this year into local language content I'd love to talk a little bit about what local language content does in India to stimulate subscriber growth on that how you think about penetrating the India market.

From who need to partner with and how your ticket pricing right over the medium to long term. So I'll throw that opened maybe to so probably touches for a little bit of everyone within the group.

This is dead I'll tell you about made incredible success with Sacred games, followed it up right away with Google and prior to that with the movie called Love per square foot and what we really really it was able to do as take this product that maybe was less known in India. When we launched and make it feel more local more relevant and what we saw was.

Oh that was following us nice steady increase in viewer engagement prior to us launching those big original shows. So they had was a product that people understood more talk to their friends more about that was written about more in the press and certain they talked about more by Influencers and then delivered with content that as an otherwise.

Available in the market series being produced at the quality the production quality sacred games by way of example.

And then to the question on pricing what I would say is we're just getting started in India and we feel like with the existing model that we have the prices that were at it. We've got a long runway still ahead of us and we've seen that and sort of increasing traction that we're getting in that segment. As we have you had a great content that Ted was mentioning we increase our partnerships, where you know improving the product.

Experience now will experiments with other pricing models, not only for India, but around the world that allow us to sort of broaden access by providing a pricing tier that sits below our current lowest tier and we'll see how that does in terms of being able to accelerate our growth and get more access, but even on the existing model, we feel like they have a long.

Long runway ahead of us in India.

But maybe following up on something that read his talked about publicly in terms of the potential for growth in India longer term, how does the model have to more to maybe lineup with longer term goals of adding 100 million subscribers in the markets like India.

Yes, I mean, well have to see what will though from expanding beyond English into Hindi and then into many more language is more pricing options more bundling.

All of those things are possible.

There is over 300 million mobile phone subscriptions are households, there's almost twice that of mobile phone subscription so theres, a huge market and people in India like around the World Love watching television so we'll take it.

A million at a time and figure out how to expand the market as we grow.

A couple of hundred million people watching content.

For the Internet and India is a really exciting idea.

Just a wrap that Eric in terms of investor expectations reads a million at a time, we're super encouraged with India and the growth that we've got early on but we know it's going to be somewhat of a tough market right. So theres.

Notion is along is a millionaire at a time right, it's not going to be overnight, where we're going to get to those higher numbers.

Is there any way to tease out when you see subscriber growth internationally like you just published for Q3, obviously, an even bigger number as you forecast out to Q4 to tease out how much in the is contributing to that versus non India and are there any markets on into the content side of the subscriber side you'd like to call out X India.

For competitive reasons, we're not going to give you too much color on that.

What's driving the piano progress is doing shows the carry in multiple territories.

Creating great synergy around those great excitement.

And that's why we really we hardly look at us and internationally, but we look at it internally almost all just globally.

And Eric as you probably saw in the Investor letter, we talked about the growth in our members has been very broad based and very global so.

I think you should read that as what we've said in the past, which is the phenomenon of Internet Entertainment is really a global phenomenon that we're we're benefiting from.

Fair enough one of the things you're shifting a little bit further down the PNM into revenue.

International saw some headwinds from FX this quarter understand the translation issues around that but wanted to understand if FX volatility is causing any headwinds or tailwinds, you're seeing in terms of end demand for the product or consumption of the product or is it purely a translation issue.

It's mostly a translation issue.

Absent foreign exchange, our ASP internationally ASP would have grown.

So I don't think we see any demand effect from foreign exchange.

Fair enough, maybe two bigger picture questions. One our that came in a lot of formats from people ahead of the call competition. As you look out to 2019, I know not within the forecast period, but as you think about how the competitive landscape might shift.

We are the market is going from a global standpoint on the competitive standpoint, how do you think about some of the friction points you are trying to solve for as a company. When you look out at that competitive landscape.

Now there are so many competitors.

Disney's going to enter.

Eightys going to expand HBIO Youtube as just on fire growing around the world video gaming like Fort nine I mean, there's so many ways to have great entertainment honest screens. So.

We don't focus that much in any one because no one seems to affect us that much what affects us is we produce the best content the world's ever seen can we get people excited about that content.

We serve it up in ways that make it really fun uneasy again, focusing on our fundamentals and someday that we'll have to be competition for wallet share, we're not naive about that but it seems very far off from everything we've seen.

So we're continuing to work with many of those firms where it makes sense do for both of us.

And it's creating a bacon vibrant industry.

Maybe one follow up to that directed a Ted when you think about the competitive landscape in what it might mean for either requiring sourcing or or partnering on content with people globally. Ted how is that changing the conversations may be as you look out over the medium to long term where might we see some of the pressure points that competition.

And could play out on the content side, well, we've been a pretty dependable buyer and increasing the some of those sellers have been more complicated sellers, meaning their conflicts it within their companies of what they want to sell when they want to sell a windows I would allow for to allow flexibility to offer their own services, which is something we foresaw years ago.

So when we started doing original programming.

In the meantime, I think that they are the studios, Nick and we're always have been somewhat of potential competitors.

I have to look at those things today and say, what's the best way to get return on investment for creating great content.

And so in some cases is going to be.

Launching it through their own direct to consumer initiatives in other cases, it's going to be selling to Netflix, which has proved to be very very positive for them for many years.

Can you talk a little bit about maybe sticking with you Ted about some of the asks are coming from content creators. We continue to here as we talked people and media industry about awards campaigns or marketing budgets put behind our content people want their content seen who are content creators how if some of those conversations changed what might be.

Looking for ways you go to market when you look out over the next couple of years trip to taking content into the marketplace well I think when you said it was perfect that people definitely want their content scene and the best chance of doing that is doing it with Netflix and you see in the long list of content brands and newly minted stars.

Out of out of Netflix just this quarter you can see what it is talking about we're talking about about putting content into the culture into this I guys and it was really great. It can denominated and when emmys or Oscars and those are really important to filmmakers and creators and we're super proud.

Happy for them when they win.

But in general we want to do is trying to make great content elevated to the right audience in the most efficient way possible. So we can do more of it and what we've seen more is that.

These these shows that get that come out on Netflix or really piercing the culture. Some of the most watched chosen television are on Netflix and the creators know that so when they would be the ask that are coming into forms of market marketing campaigns and awards campaigns, they're seeing that in very big numbers from us anyway, and we had 40 shows nominated for.

This year and became the window tied with HBIO.

For the most Emmy wins, this year and that comes with great content and great campaigns, both marketing and awards campaigns.

Maybe to follow ups here. The first one on the product side. The team has talked before about lowering the friction to consumers finding product.

That seems like a bit of a machine learning slash product development issue that you up to solve for friction points as you look out over the next couple years, how should investors think about lowering friction to consumers finding content what the some of those key investments that are being made how those investments might change in the next couple of years again I would draw your attention to the letter.

Of the.

List to give some very specific examples of people, who went from being completely unknown to being global superstars and the span of a few weeks or a few months of this quarter alone. So I think that it's evident that things are being found in.

An incredible based on Netflix versus getting lost in the sea of things on Netflix.

Our job is to make that even more over the years to common. So we're we're investing in a variety of different dimensions. One you mentioned, but in terms to design. The you X that we have user experience. Just this quarter, we released at upgrade to our TV you why navigation that allows users to be a little bit more specific in terms of the content that they are looking to browse through.

So I imagine it's Friday night, you want an engaging movie you can tell us that and then we'll present you know the recommendations the suggestions that we have of some of our growing impressive film titles that you can really have merged yourself into and that's just one of a line of multiple product updates that we anticipate having that we think will magnify that affect that Ted is talking.

About about incredible content being discovered the show and then becoming a big social phenomena.

Bigger seem that maybe I wanted to talk about was alternative content. There was a partnership announced with Sirius XM.

How you're thinking about new forms of content to be distributed on Netflix as you look out over the next couple of years. What are some of those things you think youre consumer is asking for that reduces churn gives you more pricing power gives you a higher ROI against many investments, you're making we'd look to sort of T that up broadly for the group.

Well the indicates that the Sirius XM, where that is a.

Looking for I'm kind of a marketing synergy first then of comedy initiative being able to have bites bites of our stand up comedy specials that or otherwise only available on Netflix in their entire run as a way to further to entertain.

Kansas Standup comedy and discover new talent.

And that's just an ongoing part of our overall initiative as a pretty it's a small test right now to see how that goes putting up clips and interviews and protect an interview shows featuring our talent and supporting our talent. So think about has a different way of marketing the existing program that we're doing when youre not on Netflix when you're more likely in your car.

When you shouldn't be on Netflix in your car.

So Eric per Teds comment, we're not really focused on the monetization of those efforts, it's really around deepening the brand connection, which ultimately monetizes as faster growth for us. So all of our auxiliary efforts are not around creating additional profit streams for now they're really aimed around strengthening.

Mega titles, because that's what drives the business and a little bit incremental growth is much more profitable for us than creating separate businesses. So.

We're always evaluating them onto they help the core do they help that that love of the new Standups.

Maybe continuing to move through some of the costs in the business model marketing has been a hair heavily debated.

Topic with investors as we've gone through the last year, So a pretty big change from the over 90% growth in marketing you saw in Q2 to something much lower in Q3, I think prior management's called out the idea that marketing would be sort of in a trusted learn mode. This year, maybe pivoting away from just pure subscriber acquisition.

So a couple of questions number one or what have you learned in some of the changes you made about marketing this year.

How do you think that might inform how you go to market as a company going forward, both for subscriber growth and support on the content side.

Ted you I'll take that.

Yes, I would say that when one because we've learned as we've gone along there was a time when we didnt market any of our content, we spend all of our marketing effort, just talking about Netflix or how to use it and today. We find is that selling house of cards and its final season is really all about selling Netflix. So we're learning more and more is that yes, we can drive some viewing up and down yes, we could draw.

But thats all mostly centered around getting people excited about watching it shows it's only on Netflix because it's a great thing for Netflix and how to sell the service. So that gives us and we do it over many titles because people states are very different and being able to aggregate people to talk about the same things and watch the same things at roughly the same time has got a lot of value we're still learning.

The fine arts of that.

And Eric just sort of on the financial aspect of the marketing spend.

Some of that as we called out in the letter was sort of timing related shifted into Q4. So that's sort of dynamic that you highlighted isn't a signal on any sort of some specific changing the strategy.

And that would lead to maybe my next question. So Spencer T that went up for me.

I think about the pacing cadence of investments in Q3, Q versus Q4, I thought there were some key learnings in the letter, but just want to give a little bit of an opportunity to frame what might have shifted out of Q3 and into Q4, how investors should think about that again some of the longer term investments are trying to make in the business.

It's either for tether I'll I'll take the sort of marginal progression or the quarterly progression I think we're we're balancing the steady growth of operating margin, but allowing the business to how the flexibility to choose sort of optimal release timing and and promotional timing and Korea.

That flexibility for them. So yes next year, we see a little bit more steadier progression towards the 13% target that we have for the year, but I think we'll see some natural seasonality in terms of release concert releases and maybe that's a pitch to Ted down to take take the next part.

Yes, we've really been trying to optimize on when is the best time for the content creators and for the fans to release that content and sometimes there are regulated by outside forces and other times or just trying to line up that perfect viewing time and try to try to lead with that we end up with very happy members and very happy creators.

Following up on that the comment from the letter about less quarterly variance.

Is that then just purely a function mostly of smoothed out marketing spend and the package, we have such a scale of content that it smoothed out more evenly over the year or is there anything youre doing actively to sort of create less seasonality or less volatility in the cost structure of the company's you as you look out into 19 versus 18, it's mostly the.

The latter Eric So is it we're not actively doing anything to the cost structure. We're just planning a little bit more in terms of content and the associated promotion that goes with that but it's a bit of a balance we don't want to go too far with us either because we again want to create that flexibility for the business right, we're not optimizing for.

You know marginal margin progression by quarter, we're optimizing for rolling 12 month growth of operating margin, but we're just indicating this year is a little bit unusual we don't see as much pronounced lumpiness next year as we do this year.

And maybe just one more on this probably for you David.

The 13% plus or minus.

Keeps up with sort of the pace you guys have talked about over the last couple of years were on 200 to 300 basis points of margin expansion on a rolling forward basis, what are some of the things that could cause that number to arc upward or downward that you think people should keep in the front of their mind as the business continues to make investments you mall.

The biggest one is foreign exchange in terms of yes on a mid mid term to longer term basis, we use pricing to offset.

Negative foreign exchange or dollar appreciation, but in the short term. We don't we don't immediately do that and so we can't go through a couple of quarters, where you're seeing foreign exchange effect. Both just like this quarter, where we had it affected internationally ASP, but on a mid to long term basis that should even out as we used pricing. So foreign exchange is the big.

One and then growth if we have more growth than we expected that's going to drive more revenue and we'll get more of that in the back half of year, but that could affect us as well.

Does that you just wonder if our content cost as pretty baked there's a little bit of flexibility.

Quarter to quarter, but not much the marketing.

Kind of has flexibility, but you really want to launch the title. So it follows the content schedule and you can't shifted around trivially.

So then as David said, they're mostly topline factors between FX and revenue growth the cost structures creatti stable for next year.

So following up on that we need.

Maybe it for anyone who wanted to take it you talked a little bit of free cash flow in the letter the lower end of the range a loss of about 3 billion. This year and then possibly replicating that a loss of around 3 billion next year one of the questions. It came in to me in a variety of different forms was trying to size out either Max free cash.

Cash flow burn and where some of the variables in the model that people should be focused on and Max leverage that you'd be willing to take up in the business as you think out over the medium to long term as well or using the word loss than I think you mean investment.

Definitely hope that they are not turning in the losses.

Track record would show that those investments has turned out to be very successful for us.

But I'll, let David handle the question.

Take that took the immediate one that I was going to take that.

So thanks on that yes, we're seeing those investments drive a lot of gross so there's a little bit of attention away from us.

Eric.

The biggest thing is that we're approaching Netflix is approaching a point where the growth in operating profit is going to grow faster than our growth in constant cash bed and that's really going to drive the free cash flow towards improvement it'll essentially breakeven I think what we said in the letter is flat with with the.

This year, and namely Thats, because 12 18 months ago, we probably would have expected a little bit of a steeper peak and then a reduction what's happened is caused the timing is kind of shifted back we are growing faster. So we're investing some more of that into content.

So you get sort of a flattening of the trend forward, but we expect material improvements in 20.

We still think it's going to be a few years towards breakeven because we're optimizing Jan for long term.

Cash flow and long term profitability, and we think thats the right thing.

And then in terms of peak leverage.

I think what you're going to see is at least electively funding our content that leverage ratio is going to start to improve but we're also looking at optimal weighted average cost of capital, which we've already discussed in indicated that would be.

Based on about a 2020, 5%.

Leverage to market cap ratio is where we think the long term optimal cost of capital ought to be and so once we pushed past a point, where we're more secure and where it's less about funding the immediate working capital needs of the business, we'll turn it over shift to thinking about long term optimal cost of capital.

One of the key themes in the shareholder letter was you bucketed three different forms of content number one and number two were licensed and number three clearly was original owned and operated with with the theme I thought of preference for bucket three to be the growth driver for the business over the medium to long term as you think about some of.

Your partners.

Maybe pulling content off the platform in 2019 Thats been talked a lot about publicly how do you think about either replacing that content from a volume standpoint, or just redoubling your efforts around marketing and increasing all along around existing content and scaling against your own original content plans are rather than thinking.

About those licensed buckets.

Well I'd tell you going back just a few years.

As we started right and the entering our original programming what we turned out is that our own original shows tend to be more valuable than licensing someone else's shows and later windows and the kind of the shared window model versus that purely original model. So when we invest in original show we find that we're having a better payback in terms of view people watching.

Hitting Netflix and valuing their subscription so that's why we're leaning in that way, we have a variety of models in which we used to get content.

So were really we want to do is focused on what is the best programming. So we get to be a little business model agnostic about if we don't on the IP.

Then we want to figure out how to make that deal with this piece with the people who do some cases they produce that for us in the first window in some case they produce that for their own networks and we license. It in the second window and that will continue but we were pointing out in the letter is as it's been a big do we are driving a lot of programming to our own.

Honed in produced originals that we're producing in house some of our biggest brands like like Stranger things are only produced in house.

And yet we're still licensing a lot of original programming from our from our partners as well.

In terms of Backfilling things that are coming off the site one of the better examples we think of how it could work well for US has been and our unscripted initiative, which last year, we had no unscripted original programming on Netflix and this year about half of our weighted watching of unscripted programming, our Netflix originals.

And that therefore, the benefits of and the at about the same cash outlay, but with much more efficiency, meaning people are watching him in greater numbers for the same dollar spent so and with that we have much steady or access to programming. We're building brands that people associated with Netflix like queer eye and fastest car and nailed it and sugar.

A rush. These are all shows that people really love an enormous numbers around the world and we don't have to go through the gun to your head renegotiation every couple of years what.

Ted you had some good examples before per region.

Like bodyguard and Sherlock so maybe that's the we announced yesterday, our gold production with the with.

On Sherlock.

Im sorry, not sure Dracula from the makers of Sherlock.

We are state Moffett as it we would love to make more and more guys. There was the moffett is deals at the BBC and we get to be partners with them to make Thats, great show Dracula available around the world and in a fast follow model in the UK.

And we'll do a lot more of that bodyguard is coming up at a few weeks and it's been a tremendous hit in the UK and we came in very early in that financially and creatively and we think they've made a much bigger and better show because of it and we think we can be great partners with local broadcasters in networks around the world.

Maybe following up on that because that's that's both a local area as well as a global content sort of comment how do you think about the ROI of local content and what it can do when it goes global and axis stimulant for the platform and a much broader framework and maybe it was originally planned for both Super Super Amazing.

Per about that said today has been that these local language shows have been incredibly relevant in their home country and then they worked very well in the region and then when they really connect they play multi regional and sometimes completely global and we have enough subscribers in the most in the different territories today that we can have a real global hit.

Without much viewing in the U.S. or with a lot of viewing in Latin America, and the U.S., but not in Europe .

So we're seeing a lot of those things that a benefit of scale, obviously, but also picking grade storytellers, who tell stories that people want to hear around the world and what we have found is that a a good story well told works and works in almost any language. So we long as we focus on the quality of production those shows can beat.

Work to drive local subscribers in country, but also drive global viewing when we do it right.

Maybe one more follow up on the on the content side for you Ted the film side, obviously been a big push for the company has now been multiple efforts that have gone out to the marketplace. What have you learned what are some of the friction point, you're still trying to solve for in terms of both go to market and partnering with the right content creators.

The film side, how do you think about what that does for the platform again medium to long term.

Well, we've been thrilled just recently and we're releasing original films on Netflix from really.

This directors like Alfonso Corona and Susan Bear the Cohen Brothers Tomorrow Jenkins.

And these are film people who've made movies for the directly to the theater their entire careers and are now moving to producing more and more for Netflix because what they are finding is to your point earlier they want their content to be seen they want their film to be in the diet and the discussion and they're able to do that on Netflix in ways I've never seen before.

Paul Greengrass. Some 22 July just came out a few days ago in millions of people are enjoying it all over the world and ways that you've never experienced risk films yet.

And that that will roll into 19 with big New films for Michael Bay, and Martin Scorsese and what we're finding is is that people want their audience there films to find in audience and that theyre in a bit better positioned to do that with us them without us and that said it really exciting position to be in for some levers.

Maybe pivoting back to the product side of the equation you've talked a lot in the last couple of calls about getting mobile right not only short term, but as a stimulant for long term growth read referenced earlier, there's a lot of people that want to consume content, especially mobile first as you think globally.

What are some of those product developments, we should be looking for that you are hearing back from consumers. What are your increase engagement or increased adoption of the platform that aren't there yet when you think about where mobile viewing of media content globally will go over the long term.

I think we see an opportunity to improve almost every aspect of that product experienced but I'll just throw out a couple interesting. One one is as up a method of acquisition and again, it's very consistent with what we talked about in terms of extending the partnerships. The kind of partnerships, we have with mobile operators, whether that's a bundle model like we just did our first.

Model in Japan, with mobile operator, Katie I forget about your Preloads with varies on their Android phones in the United States. So there's just all these different ways, which we can use that as a vehicle to bring more subscribers on service, but there's also a great sort of expect subscriber experience component of it too which is something that we're exploring more and more is.

Not only just to direct content enjoyment part of the experience, but things like previews and teaser as and whats coming now and how can we sort of create a continuum of experience, which is not only that great directly engage moment when you're watching that show you've been dying to watch, but also you know things that sort of lead up to that which.

Maybe no don't take a 30 or 45 minute viewing session, but you can't get five minutes, you're waiting in line and you can catch a preview show that you are excited to watch maybe you watch that when you get home later Tonight and that's the kind of experience I think we're really can invest and see.

Good returns from years ago.

Eric I think we have time for one last question. Please.

You bet look to end on a bigger picture question for re read I think you've seen other technology platforms like.

Some of the other companies I cover diversified more as they become more mature and enter new areas.

Netflix is staying fairly focused on streaming media and pushing your message globally about adoption and accretion of content. How do you think about staying focused on on the business. While we have today versus looking for areas for diversification. As you go globally that can be put on top of the business model, especially the brand awareness and the technology platform.

As you look out globally over the long term.

Yes, I think about it if you've got five to 10 years more growth in your current market youre, probably optimizing value to stay in your current market and strengthened.

Eventually your market may not be able to hold your growth ambitions, so that happened to us and DVD, we couldn't stay in DVD forever.

As we diversified to the streaming so we're open to those possibilities, but there's so much growth ahead as possible in streaming video entertainment. So we're just kind of focus on that for a very long time. Unfortunately lots of other companies are also focusing on that but thats going to make an exciting for us for the next few years great for consumers.

It's incredible for producers I mean, there's never been so much TV in movies being created around the world and so the game is on we're super excited about pleasing consumers as much as we possibly can in someday. Many many years from now we may need to diversify but for now its focus on the core of those amazing title brands.

And when you look at the content, we have coming out this quarter a next year, we couldn't be more excited we couldn't be more busy.

So with that let me thank everyone for participating in the call. Thank you Eric for conducting it and look forward to talking with you also.

Good day, ladies and gentlemen, and welcome to the alphabet third quarter 2018 earnings call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session.

Instructions will be given at that time.

Anyone should require operator assistance, please press star and zero on your Touchtone telephone.

I'd like to turn the conference over to Ellen West Head of Investor Relations. Please go ahead. Thank you. Good afternoon, everyone and welcome to alphabet third quarter 2018 earnings conference call with US today, our Ruth Porat and Sundar Pichai now 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 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 risks.

As discussed in our Form 10-K for 2017 filed with the FCC.

Undue reliance should not be placed on any forward looking statements and they are made based on assumptions as of today, 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 todays earnings press release.

As you know we distribute our earnings release through our Investor Relations website, located at APC X Y Z Slash Investor. This call is also being webcast from our IR website, where a replay of the call will be available later today and now ill turn the call over to raise.

Thank you Alan.

Our revenues in the third quarter continue to benefit from ongoing strength in mobile search with important contributions from you to cloud and desktop search, resulting in consolidated revenues of 33.7 billion up 21% year on year and up 22% in constant currency.

For today's call I will begin with results for the quarter on a consolidated basis for alphabet focusing on year over year changes I will then review results for Google followed by other bets and will conclude with our outlook Sundar will then discuss business and product highlights after which we will take your questions.

Starting with a summary of alphabet consolidated financial performance for the quarter. Our total revenues of 33.7 billion reflect and negative currency impact year over year of 385 million or 305 million after the impact of our hedging program.

Turning to alphabet revenues by geography, you can see that our performance was strong again in all regions U.S. revenues were 15.5 billion up 20% year over year.

EMEA revenues or 11 billion up 20% year over year in constant currency terms EMEA grew 19%.

APAC revenues were 5.4 billion up 29% versus last year end up 30% in constant currency.

Other Americas revenues were 1.8 billion up 19% year over year end up 28% in constant currency, reflecting weakening of the Brazilian real and the Argentine peso.

On a consolidated basis total cost of revenues, including CAC, which I'll discuss and the Google segment results was 14.3 billion up 28% year on year.

Other cost of revenues on a consolidated basis with 7.7 billion up 36% year over year, primarily driven by Google related expenses, the key drivers or costs associated with our data centers and other operations, including depreciation which continue to be affected by real.

Allocation of certain operating expenses and content acquisition costs, primarily for you too.

Operating expenses were 11.1 billion up 26% year over year. Once again, the biggest increase within R&D expenses, reflecting our continued investment in technical talent.

The growth in sales and marketing expenses reflects increases in sales and marketing headcount primarily for cloud and ads followed by advertising investments in cloud chromebooks for the back to school season, and the Google Assistant.

DNA expense trends in the third quarter were affected by a number of factors in particular the performance fees.

Accrued in connection with recognition of equity security gains, which were again, partially offset by the reallocation of certain expenses from Gionee, primarily to other cost of revenues.

Stock based compensation total 2.2 billion head count at the end of the quarter was 94372.

5314 from last quarter.

Consistent with prior quarters, the majority of new hires or engineers and product managers in terms of product areas. The most sizable headcount increases were in cloud for both technical and sales were off.

Operating income was 8.3 billion up 7% versus last year for an operating margin of 25%.

As discussed in the previous two quarters, both operating income and Oh I any are affected by the new accounting standard that changes the way companies account for equity security investments. This new standard continues to result in greater volatility once again, we've provided a table in our earnings press release to.

A highlight the impact on particular line items.

Other income and expense was 1.8 billion, which include 1.4 billion of gains in equity security investments.

We provide more detail on the line items within aligning in our earnings press release, our effective tax rate was 8.8% for the third quarter, reflecting discrete items, notably and adjustment associated with the U.S. tax Act net income was 9.2 billion and earnings per diluted share were $13.

Six cents.

Turning now to Capex and operating cash flow.

Cash capex for the quarter was 5.3 billion, which I'll discuss and that Google segment results.

Operating cash flow was 13.2 billion with free cash flow at 7.9 billion, we ended the quarter with cash and marketable securities of approximately 106 billion.

Let me now turn to our segment financial results starting with the Google segment revenues were 33.6 billion up 21% year over year in terms of the revenue detail. Google sites revenues were 24.1 billion in the quarter up 22% year over year in terms of Don.

Our growth results for led again by mobile search with a strong contribution from you to followed by desktop search.

Network revenues were 4.9 billion up 13% year on year, reflecting the ongoing momentum of Admob and programmatic.

Other revenues for Google were 4.6 billion up 29% year over year fueled by cloud and play.

We continue to provide monetization metrics in our earnings press release to give you a sense of the price and volume dynamics of our advertising businesses.

Total traffic acquisition costs were 6.6 billion or 23% of total advertising revenues and up 20% year over year.

Total Tac as a percentage of total advertising revenues was relatively flat year over year, primarily reflecting a favorable revenue mix shift from network to sites offset by an increase in the sites Tac rate.

The increase in the sites Tac rate year over year was driven by changes in partner agreements and the ongoing shift to mobile which carries higher attack.

This quarter, we experienced a year on year decline in the network tax rate due to a combination of factors, none of which were individually significant.

Google stock based compensation totaled 2.1 billion for the quarter up 23% year over year.

Operating income with 9.5 billion up 11% versus last year and the operating margin was 28.2%.

Accrued capex for the quarter was 5.6 billion, reflecting investments in production equipment datacenter construction and facilities.

Let me now turn to other bets revenues were 146 million primarily generated by fiber in the early.

Operating loss was 727 million other bets accrued capex was 55 million in terms of other bit updates for the quarter with waymo in the third quarter. We dealt on our early rider program, both expanding degree participants and beginning to test pricing models.

There really the team continues to execute on its various partnerships with leading pharmaceutical companies consistent with its mission to move medicine from reacted to proactive.

Recently launched efforts included joint venture with resin that to focus on sleeping disorders, and a research collaboration with kellyanne.

Finally, you can see in our results the benefit and quality of our investment teams JV and capital G., which are also within other bets within the 1.4 billion of reported gains in equity securities in aligning approximately 400 million was realized in Q3, there will be more detail on these investment.

Activities in the 10-Q.

Let me close with some observations on the quarter and our longer term outlook.

First with respect to revenues in the third quarter results reflect FX headwinds with U.S. dollar strengthening in contrast to the Tailwinds that enhanced reported results in the first half of the year. We continue to be pleased with the underlying momentum in our advertising businesses as we apply our strengths and machine learning to improve the.

Variance for users and advertisers.

As we noted hardware was only a modest contributor in the third quarter as we launched a new made by Google family of products for the fourth quarter holiday season.

Second with respect to profitability within cost of revenues. The biggest component is Tac, we indicated on the fourth quarter 2017 call, but the pace of year on year growth insights Tac as a percentage of sites revenues would begin to flow. After the first quarter 2018, and you can see that.

Again, clearly in our results this quarter.

As frequently discussed we do expect the sites Tac rate to continue to increase year on year, reflecting ongoing strength in mobile search.

Looking ahead, we expect seasonal impacts to our other cost to sales from hardware sales, which are typically higher in the fourth quarter of the year as well as from increased content acquisition costs for you to which have also historically been higher in the first fourth quarter.

Within Opex, we continue to prioritize our investments to support long term growth.

In terms of head count growth was seasonally higher in the third quarter, because we brought on new graduates we are continuing to invest in adding talent to our priority areas, particularly for technical roles in engineering and product management and to support our most sizable growth areas in particular cloud.

As I've mentioned previously regarding sales and marketing expenses are more heavily weighted toward the back half of the year have you seen as you have seen in prior years. These expenses are particularly elevated in the fourth quarter to support the holiday season.

Other bets remains a portfolio of earlier stage businesses focused on addressing sizable markets. We are moving toward early stages of commercialization, while continuing to calibrate the pace of investment against achievement of key milestones.

And finally with respect to Capex you can see our continued investment as we build the infrastructure needed to support the opportunities we see across our businesses.

Includes a number of data center construction projects in flight as well as ongoing expansion in our compete capacity.

Ill now turn the call over to center.

Thanks, right, we had a great quarter and it was particularly special I guess last month, we celebrated Google 20, it but day and the 10th birthday of Chrome.

It's exciting to thing that 20 years and be a still just at the beginning of what's possible.

We get billions of question some uses everyday and about 15% of those are queries, we have never never seen before.

Our mission to make the Watson summation accessible and useful asked relevant today has spent restarted.

I want to begin by highlighting our recently launched family of hardware. It's a great example of how we bring together Google strengths to help people through the day.

Then I will touch on base AI is helping US approach our mission I'll give an update on our media and advertising platforms and finally I'll talk about our growing cloud business.

First hardware.

Every year, we have a new opportunity to push the boundaries of computing.

Those experiences come to life in our made by Google hardware, which combines the latest advances in software hardware and AI.

Our third generation is our best yet it includes the picks up three Google home hub, the pixel slate tablet and mobile.

We're getting great feedback and I'm very excited for users to try these devices, especially at the holiday season approaches.

Our new hardware lineup showcases the best of Google, including the Google Assistant.

Android chrome.

With the picks up three you've used AI to create a best in class camera new features like Topshop make it so you never missed a shot.

Okay timing wasn't perfect. The camera close I, just a better frame and give you the option to save.

And night site will help you take really good pictures even in badly.

Picks of three also has a custom security chip called tighten that.

It was built to secure googles owned data centers and now we are bringing it to our users.

We also released Google home up our first smart speaker at the screen. They chose the a morning commute lets you control of your smartphone and gives you had free help in the kitchen.

And picks of slate chromo us re imagine as a tablet with all the great taps from the placed.

Our hardware efforts are picking up real momentum.

For example, daily active users of our Google home devices have grown by over Fivex and the last year alone.

Incredibly proud of our growing hardware team, including the talented employees, who came over from hatch DC and.

Our investments are paying off SC bring the best of Google to more uses and in more countries around the world.

Even as the build up our hardware business, we continue to advance our mission across our core products and platforms.

Last month, we kicked off 20 years of Google search by introducing some of the biggest updates in many years.

They include a new AI powered ranking approach that delivers more relevant ourselves.

Redesigned Google feet call discover to help you stay informed on topics that matter to you.

And the new search experience for Google images.

We also continue to tackle the information problem of kind of think people development jobs right from search.

This is already help connect or 100 million people in 92 countries to job listings that meet their needs and skills.

Now you a service members and search for jobs for veterans and enter that amenity occupational cold to see relevant civilian jobs.

The Google Assistant continues to gain traction drawing on our strengths and machine learning unhelpful, Google services like search Youtube and maps.

Expanded the assistant to 20 languages and 76 countries.

And it can now understand and speak more than one language at a time.

We launched a first set of smart displaced Atlanta will and JBL.

So that's our on Google home hub.

Pixel uses in the U.S. will be the first to try on your duplex technology, which helps you complete real glide path over the phone like calling a restaurant to book a table.

And we introduced a new way to easily book right services, but the of Google Assistant.

And maps, we also made several improvements, including a commute tablet life traffic and plan such information and support for mix more components.

Earlier this month, we announced an exciting test called project screen.

We're working with video game publisher, you'll be soft to stream. The latest game assassins Creed Odyssey to chrome browsers on laptops and desktops.

Streaming graphically rich content for video games presents a great technical advance and we look forward to seeing what's possible here.

I'm, particularly proud of our strengths and AI are creating life canyon contributions in other feet.

For example, our recent slept prediction efforts, which use AI to better predict van flexible up car has the potential to help millions of people get out of harm's way.

We are starting in India that 20% a flood related fatalities soccer today, and we're looking to expand to more countries. So.

Earlier this month, our research a showed how they have applied deep learning models to improve the accuracy of diagnosis for metastatic breast cancer.

Our research found that pathologists and AI can work together more effectively than either alone.

Moving to our video and advertising platforms, which have creating economic opportunities for partners around the world.

First you too.

One, particularly 80, our focus is educational content.

Everyday people from all over the will turn into your Twoq to learn something you from carrier scales to coating to cooking.

Just this week, we announced a 20 million dollar investment to expand our you tube learning initiative, which will help on established and emerging educational cleaners. We.

It also partnering with organizations like goodwill and Europe to create curated playlist that teach carriers because directly in our new learning channel.

Your tubes ads business continues to provide great results for marketing and creators.

Advertising beat me announced that we'll be expanding our popular trueview for actions format.

This helps users stake action definitely from video ads. They can now do things like sign up for a newsletter and soon they'll be able to define movie showtime's download apps or even buckets right.

Right from the at.

For creators Youtube is continuing to build automated revenue products like Super chat channel memberships and the ability to settle merchandise directly to France.

Youtube gaming creator marquee player increased its revenue by 20% using channel memberships.

We continue to see positive traction for our newest subscription experiences to.

Yes, you premium Youtube TV and Youtube music premium are continuing to expand to many new countries.

The team is also investing and growing and improving the newness experience on Youtube more prominently surface incredible new sources on the platform, it's a big priority for us.

Next our advertising platforms.

But I says love that via bringing our machine learning strengths to offerings like responsive, so chats and universal lap campaigns to create more effective assets.

One New example, as smart shopping campaigns, which you signals like seasonality on price to optimize banner ads are shown.

Tens of thousands of advertisers that are using this and seeing an average of 20% more sales for the same budget.

Just last week, we announced that Nike best buy Interflora, joining our shopping access program.

This allows people to most seamlessly from browsing to buying with a universal card that works across Google search under system.

In apps, we announced a partnership with unity technologies, which gives advertisers access to one off the largest global networks of mobile gaming titles across 1.5 billion devices.

Unities developers can monetize that apps at Google ads without any additional development work.

And lastly, our growing cloud business.

Google Cloud next we made over 100 announcements, including the tightened security key.

Features Google decide from there to help clarify.

Nothing on a custom husky has been Tampa.

And we expanded our breakthrough cloud auto ammo portfolio, which now includes vision natural language and translation.

And all over the world, we have seen great customer adoption of our cloud platform.

But the help of S&P Metro wonderful largest b to B wholesalers globally is centralizing the finance system on Google Cloud platform.

Hey, using Macquarie to generate data driven insights to help create more personalized marketing campaigns.

In the U.S., we partner with the National Institutes of held to provide access to cloud services that help researches access large datasets.

Accelerate biomedical advances.

We also added new customers like I, Aegean broadcom, joining existing customers like pay Pal anzi bat and Kroger.

Our G suite business continues to fuel consummation and companies large and small and we crossed two important milestones in the corner.

Google Drive became the eight Google product with 1 billion monthly active users and she made now has more than 1.5 billion monthly active users.

One off our big wins in a quarter was fast retailing the Japanese retailer best known for its popular brand Uniqlo, which is migrating its employees globally to G suite, while also pursuing AI solutions like on demand forecasting on Google cloud platform.

Our cloud business is benefiting from our investments in technical infrastructure, including a U.S. Europe cable steadily improve speeds for millions of people.

Before I wrap up I want to quickly call out our continued momentum in Asia. So that's the investments that we are making in the U.S.

So you can see from ourselves revenue growth in Asia Pac remained strong does that inflection off are very focused efforts to build great experiences for the billions of people across the region.

But at many of our core products like search maps and you do you have to work well for the next generation of users coming online.

It also building products to meet the specific needs of uses in the region like pass a digital payments App for India to help people easily pay that attrition or split at interval, but just a few taps.

Just one year since it launched over 30 million people in businesses across India now use to App every month and they have collectively made more than 1 billion transactions.

Recently rebranded the apt to Google pay asked me look to bring many of the ABS features to adapt to others around the world.

We're also investing closer to home.

In Q3 more than 80% of alphabets total capital expenditures was within the U.S.

Not only do these investments in Datacenters machines and offices allow us to provide great services to uses.

They have a strong positive impact on the communities around them supporting thousands of jobs and countless local businesses.

This year to date, we have added over 9000, new employees in the U.S. and.

And we continue to grow faster outside the bay area down in it.

So you can see this exciting momentum across many different age.

I'm constantly struck by the number of incredible opportunities ahead of us as a company and how far we've come over the last 20 years.

I want to say, a big banking to all of the Googlers around the world will help us deliver on that mission everyday.

With that I'll hand, it back to.

Thank you sender and we will now take your questions.

Thank you, ladies and gentlemen on the phone lines, if you'd like to ask a question at this time. Please press star number one key on your Touchtone telephone. If your question has been answered what do you wish to move yourself from the Q you May press the pound key.

And our first question comes from Eric Sheridan.

Your line is now open.

Thanks for taking my question two persons or if I can referencing the blog post the changes about how you see future search wanted to know what some of the key investments you think the company needs to be.

So that search become more visual or relevant and what that might mean, tying it back to the business for gains on with your products.

Relevancy of that medium to long term and then with respect to your comments on you tube. We're starting to hear from advertisers that are some blurring between brand and direct response.

AD budgets as they look at product, maybe or cross blended lines.

Sounds like Youtube announcements coming out of bad we were about thank you to more responsive or more direct response.

How are you thinking about the flooring of those lines at one of them for product development long term. Thanks, so much.

Thanks, Eric Oh, I'll take the to the first on search you're right that you know.

Such we're always trying to anticipate very use is what the user experience expectations are I'm trying to meet them there and increasingly mobile you know people do want immersive engaging experiences they want to experiences to be more visual and that's partly what what you saw us announcing aren't going to get body event.

And and you know we're excited to move in that direction and I do think we have a lot of important assets to bring here. A you tube is a big part of what we do.

Testing and you made search and and we do have products like Google maps, and photos, which I'll add to that visual experience.

And as part of doing that a you know we are we are investing in our advertising offerings. This fall and so over time, you know when will that up that so they go hand in hand, but I think it's an important evolution for us.

In terms of your too I think you just part of what makes you to upgrade is I think I think we can offer different opportunities for advertisers.

We've always felt better correspond to something that can work well on Youtube and our instinct is bearing out and I look at my personal use cases that are many times now sometimes and stuff search actually find something I wanted to do in you tube, maybe thinking about going to a place and I'd centered on you tube. So I think it offers the same opportunity over.

Time and from a standpoint, we want to make sure aviat evolving the product approach to bring those opportunities to advertise this I'm very excited by it.

Thank you.

Thank you and our next question comes from Dan Salmon of BMO capital markets. Your line is now open.

Good afternoon, everyone Sundar two questions for you first earlier this month or it might have been late last month Shreedhar Ramaswami your head of ads and commerce left to go to VC firms.

That's betting that wasn't a surprise to you, but I'm just hoping you could shed a little light on sort of succession planning for that important role and whether or not you expect any sort of broad changes to add product strategy.

And then second just amongst those announcements on the anniversary.

Where the evolution of feet to discover and I recognize that's a an evolution of a product, but it does look like you're taking advantage of that.

Long unused white space on Google Dot Com, and so just love to hear a little bit more sort of a follow up on Eric's question on the evolution of search, but but how you see that surface in particular evolving and particularly the potential for AD monetization overtime. Thanks.

Good on.

On the first one.

Look I mean, we one other things I'm really proud about Google as we have a deep bench of talent and you know and and you know for example in the apps team almost all of our senior ads leadership has been here for a you know well over a decade and so for US we are fortunate to be able to tap into it are.

Thats leadership comes.

No problem sucker, who has taken over our ads product and engineering efforts someone I work with for many many years and and most recently you know has led to our G suite business, but asked on many deals before it's a deep computer scientists and a you know and I expect to.

For him to continue our tradition of technical excellence with the Ti approach you know approach our advertising work also Wanna mention I, you know Philip and his team.

His extraordinary team a you know who definitely.

Lead many afraid initiatives here and Sullivan provoq or with them I think it's in great hands on expert to lot of continuity there.

On your question on search and discover a you know it's in addition to making such more visual one off one of the thinks me a very very focused on is not always to use it turned to us actually asked the question. So we feel our job is to be there and use this need us anticipate what they want and sometimes pro.

Actively meet them, that's where services like discover really play a role right I think and we are thinking hard about how we can sell faced relevant information for our uses stuff. They are really looking for can act on a in a in a way in which its delightful for them and it's showing up for them and they need so I see that as an important evolution.

So just wall and so you're going to see us investing more mobile offers us a great opportunity and if you. If you use it and picks of three a you know that's the latest product and Mitch we bring our vision of how to bring all these products together and then we'll give you a good sense of how we plan to do that overtime.

Great. Thank you.

Thank you and our next question comes from Anthony Diclemente of Evercore ISI. Your line is now open.

Great. Thank you for taking my questions first for Sundar.

Spend some time on hardware spent.

Time discussing your suite of hardware devices that Google assistant pixel how are you measuring the returns on those investments in hardware.

Both in the products and on the marketing side here in a pretty competitive marketplace. What are the milestones for success that we should be looking for on hardware and then for Bruce as.

We start to look ahead to 2019 as you plan for 19, how are you thinking about the relationship between revenue growth and dollars of operating income growth for next year, particularly if the macroeconomic environment where to become let's say less of a tailwind to the broader adds environment as it was.

This year and in prior years. Thank you.

On on hardware you know I mean, we always want to be at the forefront of computing and and you know and so and lot of time studying was thinking across the whole stack, bringing together how the impaired experience in an integrated me for our users and the I you know genuinely see a very differentiate.

Wait to do this you know we think of our approach of bringing together AI software and hardware is unique and we think we can deliver the best in class experience and we are committed to doing it.

The same time, we want to build a great business here as well so be it investing in the long run because we see it clearly as a as an important business opportunity for us as well so both go hand in hand.

We closely lookup metrics in the metrics. We've we've been very focused on for the last couple of years does our third generation of hardware. It's the first time, you actually are doing our products and to him and we've expanded to newer categories. We looked at user feedback and reception of him or her NPS scores.

And a you know our scores are now reflecting best in class and the category.

And bill and beyond that you're looking at how the market adoption. This and we are possibly building a business, but they've committed to building on investing for long run.

And in terms of how we're thinking about planning we're in the middle of it now and you know many of the questions that have been already asked a sort of point to the direction. If we feel really good about the underlying strength in the ads business as Weve talked about on numerous calls we continue to invest here.

Because we see ongoing opportunities in particular, as we leverage machine learning to provide better experience for users and for advertisers and some of the comments. It Sundar made about the opportunities that open up with visual search again continue to point the direction direct response, continuing appointed to say.

One of the underlying areas in which were focus but as we've talked about on prior calls that's one element of it and we continue to invest for up opportunities that are sizable over the long term centers already commented on both hardware and cloud is.

Really important examples and we think the steps that we're taking the investments we're making our provide 'cause it foundational support for ongoing long term sustained growth and so then we marry that with the second part of your question, which isn't how do we think about the pace of investment as we said repeatedly we're very focused on investing for the long term we're trying.

To make sure that we prioritize crisply across the opportunity set that we haven't we make the right types. The tradeoffs, but we do remain focused on long term investing given the scale of the opportunities that we see.

Got it thank you.

Thank you and your next question comes from Mark Mahaney RBC capital markets. Your line is now open.

Thanks, two questions. Please one so there could you just update us a what's your thinking on China, China market in the extent I know Google was already in that market, but the extent to which you want to expand we expand your presence there with search and then in terms of Waymo. Just a quick question the commercialization of Waymo genome. When do you have a sense of.

When you'll have pricing established and you'll have a roughly well defined in action acted on a go to market strategy with label is at the end of this year beginning of next year whenever thank you.

And Mark on on China, You know, we obviously are you know we deeply care about setting Chinese uses for you've been investing for many years and.

Uh huh, especially from developing Android.

But more recently, we have launched mobile apps, such as cooler translate in five SCO and you know improved our developer tools. There. So you know we are we're constantly looking for ways by which we can better so Chinese uses and that's where.

That's fair VR VR today.

Yeah.

The waymo in the third quarter I think you know we extended our early rider program to a larger group and we moved into very early days of commercialization. So we do now have people paying for rides and we're also testing pricing models I think the main point. We said this repeatedly is that we our intently focused on.

Safety first and ensuring a great user experience and so what that means is where it really expanding the program methodically. We're taking an innovative approaches we continue to broaden the geographic footprint and then on top of that as we've talked about on prior calls we've been developing the beat it the opportunity so in Phoenix as an example, we've been.

Piloting with several partners, who are sponsoring its service on behalf of their employees and customers.

And again, it's early days, so small revenues that were pleased to be testing this out as well and then on top of that continuing to explore applying our technology for logistics and deliveries and for personally used vehicles and for last mile solutions for cities. So you can see a move in the third quarter, but as we said repeatedly it's very early days and we are taking.

Hey, very deliberate entered of approach tape broadening it out.

Thank you. Thank you center.

Thank you next question comes from Brian No lack of Morgan Stanley . Your line is now open.

Thanks for taking my questions I have to the first one on on map monetization and putting some more ads in the map can you just talked about sort of early early learnings. There I know you've talked about local mobile search is growing quite rapidly in the past, but any any early learnings from the monetization and the return that advertisers are we getting on that front and the second one on video games and.

Project stream could you just talking about how you think about the gaming opportunity for alphabet and what you think are the key factors you need to tackle to really build and scale a direct to consumer facing cloud gaming product.

Look on the on the add stops me Vad AD formats maps for sometime and you know and we are constantly working to make it more useful in relevant.

But I wouldn't underestimate the focus we have on local you know that.

Right foot traffic to local businesses right and it's going to roll out in the coming coming months and so that is a big focus as you pointed out we're definitely launching an experimenting with New York AD formats on on maps itself. They have promoted places which appears on the map itself.

The of play speech ads, which appeared on Google listings and maps and search.

But we had definitely in the face of.

You know, putting those testing it out making sure they use that experience works and making sure we can deliver.

Value for advertisers me being patient here because the opportunity in local search a you know, it's a big opportunity and be a focus there.

On your second question you know look we today a set of our uses on gaming across all across glass, but in many ways right. Obviously, Google play. That's this a lot it's a big important vertical on Youtube and and so we are so be touch you know we touch.

With gaming developers across many areas already and so we had thoughtfully thinking about what more we can do that and project stream. A you know why having spent my life when computing was blown away by seeing our ability to stream of game, which in <unk> needs real time, and tractions and to be able to do that.

The cloud and it's one of them or you know most important technological advances have seen in awhile and so we are going to focus on that then and make sure we're making progress there and bring on you want experiences for gamers.

Great. Thanks.

Thank you and then next question comes from Douglas Elliman of JP Morgan. Your line is now open.

Thanks for taking the questions one for Sunderland for Ruth Sundar can you help us better understand how the remedy in Europe will work in terms of licenses intact going forward and what impact do you see that having on financials and then Ruth can you just talked about where you are in the hardware replacement cycle in your data centers pretty major step up this year just given.

At large ramp how are you thinking about the trajectory into 19th Thank you.

Thanks, Doug on on on on Europe , a you know me, it's already to say I will begin on the implementing the remedy in that in the next few weeks.

But in all these cases, a you know we always a you know weve focused on complying with the commission stacked up.

And we want to make sure that the transition for both our uses and our OEM partners. This as small as possible.

In this case, you're dealing with lifecycle is for mobile phone. So changes is going to take some time to be chooses.

And it's difficult to predict how the licensing model will be adopted but you know our products are very popular with users across platforms.

And and so it's it's early to say, but we are focused on doing the right thing there.

In terms of 'em technical infrastructure, and our Capex you know as we talked about last quarter.

Capex reflects our view of the growing opportunity set in our core adds in search businesses as well so longer term opportunities and newer businesses in particular to support cloud.

And very importantly, as we've talked about machine learning across alphabet, and we're particularly excited about the opportunity with machine learning because it opens up more services and products for users and for advertisers and for enterprise customers and so given our view about the long term potential with these opportunities we're very focused on sure on ensuring that we have.

The needed compute capacity to support growth and that's what you're really seeing with the uptick and investment to give you a bit of a break down the largest component continues to be machines at relative to last year. It's important to note that data center construction is an increasing percentage of our capex.

Last month, and so we're now in various stages of developing more than 20 data center sites globally. We're also investing and network infrastructure such as undersea cable. So we can deliver speed and quality. So again this really goes to where our view of the not the opportunity set.

Having said, we do remain very focused on optimizing the use of Capex and also on compute efficiency. We're very mindful of the fact that our decisions here on Capex don't just result in Capex spend but also translate into higher depreciation expenses and that goes to cost to sales and opex.

Yeah, very careful about how we're using it but I want to make sure that we've built for the requirements that we have and as much as you asked about technical infrastructure. Just a quick note that our facility spend namely real estate was more muted this quarter and it was primarily just on the ongoing work on our ground up development, So you're primarily saying what's going on.

Local infrastructure here.

Great. Thank you Beth.

Thank you and our next question comes from Ross Sandler of Barclays. Your line is now open.

Great two questions. Ruth So you guys posted pretty solid growth all around.

If we will get some of the international markets each geography at a tougher comp and decelerated a little bit on a currency neutral basis. So I guess stepping down high level or the growth rates are our solid but can you give us any color on overall macro picture here I think we're getting.

Next feedback from from different companies across different sectors. So any high level of comments would be a would be helpful. On just the AD market given that you're close to 20% of global advertising ex China and then Sundar question on.

On I guess pixel and just the overall advance what you're seeing and.

Smartphone devices. So as you guys were a lot more products like lens and GE board and some of these other utilities on top of a you know your billion plus apps like search and youth is there any way to parse out what you would roll engagement looks like in markets like the U.S. in Western Europe , when the phones are improving or functionality in can you keep adding.

Are these additional utilities is query volume going up on a per user basis any color there will be helpful.

So in terms of your first question, we actually feel pretty good about the strength globally, which you know, which I noted in opening comments, a you know across the board 20% growth in the U.S. under 15 billion dollar base cinder noted what's going on in ATAX, 30% year on year gross it's now.

Now over a 5 billion dollar revenue business and we've had sustained quarter. After quarter grows at this you know kind of Thirtyish percent area feel really good about that you know in by country. It really does reflect a broad based strength is he said, we're very focused on the region and.

We're delivering terrific products and experiences and rapidly growing markets. It stays the same thing and other Americas neutralizing for currency movements, 20% year on year growth. So we're really proud of what the teams are doing.

Around the globe.

You know on your second question you know one of the things, we clearly see even me and make a hardware product like pixel and Mitch all all the all the tools than they used for these people to our you know our conveniently there integrated them experiences great. We definitely see uses engaging more ad.

And you know and so we see an opportunity and that's one of the bigger reasons why are we do hardware as well to show that the into an experience both for our ecosystem aswell as for US It helps us.

Give uses a much deeper engaged experience as well and and you know when you. When you look at all our products. A you know we see that and so you do see that as an opportunity.

Thank you and our next question comes from Michael Nathanson of Moffettnathanson. Your line is now open. Thanks I have two for Sundar kind of the same same one on the pixel through the marketing message is clear of the product looks great, but I wonder when you look at to date.

The success wrapping the product what's gonna gating factor has been.

The carriers has been the price and we look at the factors for White house and scaled as much as a product should have scaled one of the factors and then on thoroughly you called out some deals you've had with big pharmaceutical companies. This does this quarter, but again there I wonder.

Who's your most natural partnership is it hospitals insurance government can we think about the big opportunity, whereas the most natural fit to drive early going forward.

You know on on on pixel look you know festival you know part of the Big thing as does our Tage ambition of hardware each generation festival, they've been scaling up the product in terms of even the number of units we can make and so on so you know we you know if you remember the first couple of in patients who are struggling to meet the early demand we saw.

Oh this the first year, we have done it and to N. and be a ramping up from there and so each year when I looked at all the metrics speed and B S. All beat our sales I beat our side you know revenues had said that everything is progressing well, but there are you all right. The gating factors a you know to ramp.

Well first of all this to be able to build a supply we need and second is you know go to market getting getting ourselves and asked many locations in retail as possible in asked many countries as possible the bass, many cut cat or kind of your certifications as possible. So each of those dimensions, we are making a proper.

Yes as well.

Terms of they're really yeah, when we talked about there as.

They have partnered with a a whole host of leading pharmaceutical companies focusing on specific diseases, whether its diabetic.

Right not the weather or across the board for neurological diseases, I announced a couple or a new partnerships that the resin that.

Arrangement as well its gilliat and that's what they tend to do they partner with best in class to focus on specific areas, where a working with the pharmaceutical companies. They can and the M.D. technology, we haven't benefiting from machine learning, we can really move from reactive to proactive care. That's the that's the narrowly focused.

Thanks, Ruth Thanks.

Thank you next question comes from Heather Bellini of Goldman Sachs. Your line is now open.

Great. Thank you I just wanted to focus on cloud a little bit more Sundar you gave some good color in your prepared remarks, but I'm wondering if you could share with us and update maybe on the partner momentum in direct sales momentum you're seeing in the market how you've seen that change and also if you could highlight.

If you've noticed that there's been noticeable changes in win rates over the last year as the product continues to mature and you also in the beginning of the year and exiting Q4, you would give us some high level growth commentary about TCP and I'm. Just wondering if you have anything else you could share. Thank you.

Thanks, Heather looking overall I mean, you know it's now now we've been doing this see if any of the next level for.

Three years and you know we're definitely seeing strong indicators that are they investment in product or you know is clearly beginning to work or you know our value proposition Duff come through in many competitive situations I've seen a you know many important vans and what seemed like very very competitive situations.

No I also don't I, you know from that from the baby see it doesn't look like as you know some game I see as you know it's the other thing a large market opportunity here.

It seems like very early days and more importantly, the agenda sense I get is very aligned with where the market is headed in the long Grom. You know this notion of supporting open architecture. So that the enterprises don't see law, Dan and I loving, allowing for a multi cloud environment to double up.

That's the data can be a betting on and all indications are that the market is headed in that direction that small so that gives us a lot of comfort.

That is that that give us a lot of comfort as well and on the on the go to market side that you know we have really ramped up both in terms of far our investments our direct investments, but also our partnership strategy is beginning to work and when I looked at the pipeline I had a you know that's the epley anything momentum basketball.

You know in this business.

You know obviously, the enterprise business, placing the vein, which you do have vans, but those accounts turn into larger revenue decrease over time and and so it's very clear to us that we are laying the foundation. We are getting the strong early momentum and that's that's the big reason why we are investing.

Strongly in the area and overtime will obviously share more here as well.

And could I just ask one follow up its possible I was just wondering if you will get Microsoft they have a on premises and cloud strategy. If you look at Amazon what they're doing my date up you added from the M., where they're kind of doing a similar strategies do you think there's a requirement for you to also have then on premise.

Strategy to solve the hybrid world as long as its hybrid for thank you.

You know I you know we have possibly looking at it you know maybe are increasingly working with partners like for example, our partnership from S&P yard a pivot, though the embraer. These at all on hybrid cloud solutions and so we are you thinking about you know how to do that better and our overall approach to cloud hybrid modernization.

I think is that right long term direction and so we're doing that and you know there are many many situations VR and their on premise a big big big requirement for customers, but with our partnership approach, we've been able to address the needs. While so I don't see that as a gating issue for us.

Thank you.

Thank you and your next question comes from Brent fill of Jefferies. Your line is now open.

Thanks, Ruth I just wanted to see if you could quantify the FX headwind I think you were it was and negative 1% for Q3 in Q4, you anticipated to be similar a little worse.

I will let you forecast the dollar a you know it is he noted it was at what's the point here. It went from at a tailwind in the second quarter to a one point drag here going forward, but we called out there and well have more in the queue, but you know noted the impact for example that pretty big Delta between our reported in fixed.

In other Americas, 19, 20% growth and that was really.

What was going on with the Brazilian around the Argentine peso, we saw some movements and other currencies around the globe that you can see that which is why we broke out there that's the geography or the way we've done it.

Number of quarters ago to try and give you help give a better sense at the types of headwinds and I'll, let you forecasted dollar.

Okay. We look forward to that real quick just on on EMEA <unk> you were flat on on your constant currency growth, 19%, 19%. The last two quarters. Despite with GDPR. So I would I believe that would suggest that you're probably not seen as big a had when perhaps it is maybe some excess.

Could you just talked to.

The European business, and what what you're seeing there.

Look I mean, specifically I think if your question, it's around GDPR and so on a possible I mean, we've always been as a company very very focused on a use of privacy and security and so in some ways you know I believe it or very early on engaged on a you know GDPR.

We worked very hard to make sure.

Our products are ready in in compliance.

Generally always approach our products with a strong privacy lens for our users so and I think that helps us a walk through these these changes because I don't think they had at odds with <unk>. What we're trying to accomplish I think GDPR US out you know very good and comprehensive set of regulations, and you know and and so I think.

It's been good to see a smooth transition on our products and for our users.

Continuing to invest significantly in Europe , because they see the opportunity across Europe and are investing in the communities in which we're working.

Thank you.

Thank you and our final question comes from the line of Justin Post at Bank of America Merrill Lynch. Your line is now open.

Great. Thank you one quick one for Ruth people are really.

Asking about Amazon just wondering if your ecommerce vertical was any difference versus your other verticals in the quarter anything to call out there and then secondly, Sundar you know a lot of interesting things going on with you tube in Waymo and cloud and other areas. If you look as you look out two or three years do you think any of these businesses can really make a financial positive.

Difference on the bottom line.

For overall, Google Thank you.

Look I mean, I think on the first thing on ecommerce maybe.

I'd really you know people you know, we do see a lot of activity in the vertical on our products and we see strong growth there as well we see as an important use case and that's why we are investing a lot you know if you look at our recent work with a shopping actions. That's an example of the kind of work we're doing there.

And ER and when we do those things, we clearly a U.S. who uses respond.

Like for example on shopping actions second we just recently had partnerships at best buy and Nike and so far I mentioned earlier. So we're continuing to invest there a you know on and we also driving strong partnerships with the retail sector.

Both in terms of our shopping experience assess whether through cloud and I think that continues to be a big opportunity and only a broader question look the reason we are investing across Google in alphabet UNICEF areas, it's because as a company or the past 20 years, you know weve doubled up deep capabilities and technology and compete.

Your science, and especially with machine learning and AI and we see an opportunity to apply that across a set of important 80 is that a lot of opportunities ahead of us be a pretty disciplined about very focused on and be a focused on real large opportunities than many mentioned 80, s. like you tube and blame on cloud and hardware they they often the case.

I agree, but you take a very long term view and we want to investigate the user experience right and we're pretty confident that when we do that the value of hall.

Thank you center.

Thank you and that concludes our question and answer session for today I'd like to turn the conference back over time in West for closing remarks, thanks, everyone for joining US today, we look forward to speaking with you again on our fourth quarter call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.

Thank you Shirley and good afternoon, everyone welcome to Tesla third quarter, 2018, Q and a webcast I'm joined today by Elon Musk JB, Straubel, Deepak, a who job and a number of.

Other executives are Q3 results were announced at about one PM Pacific time in the update letter we published at the same lingus. These webcast.

During this goal we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today.

Actually actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the FCC. During the question and answer portions of today's call. Please limit yourself to one question and one follow up.

Please press Star one now we would like to join the question Q, but before we jump into Q and I you don't have some opening remarks you want.

Thanks Martin.

So I went to opening remarks, then we're going to talk about vehicle safety.

Autopilot and factories.

We have a number of people Tesla here too.

Elaborate on that I think because there's a lot going on that so.

I find interesting.

I want to separate they for all of our customers employees and shareholders.

This was an incredibly stark quarter for Tesla most reproduction stabilized were delivered a total 84000 vehicles locally which is 180% of vehicles that we live in all of 2017.

In fact reload more causing this quarter than were done all of 2016 every single quarter.

Model three became the vessel in card U.S. in terms of revenue, but there's so many heart in terms of volume.

We still have revenues at significantly better profitability in our energy business.

I think for solar it may have been the best quarter ever for solar we achieved GAAP net income over $300 million.

Increased cash equivalence by its own or $31 million attitudes are greater than 20% gross margin.

The model three.

Moreover, we expect to date have.

Positive net income and cash flow into full and I believe.

Our aspirations so if it will be for all courses Guard board.

I think we can actually be.

Cash flow.

And that profitable quarters going forward, leaving aside the quarters, where we may.

We need to do they significant repayment.

For example in Q1 next year, but I think even even in Q1.

I think we can be approximately flat in cash flow.

In the quarter.

This quarter was made possible by the incredible execution of our employees across the board from sales production delivery service energy inherited finance and all about your native really every part of business executed incredibly well.

What I think everyone again for incredibly hard work.

I I, especially want to thank customers who.

Hello.

Like I've never heard of us reduces happened before but I've never heard of a case, where a company as customers actually <unk>.

What about the future the company so much that they volunteered their time to help the cup public company succeed.

Yes.

That's amazing.

So I don't see that anywhere.

So.

Yeah.

It took me I've actually does this quarter, we start rolling up Rolling out version right about software, which so big software upgrades for years and all three received the five star Saturating every category and subcategory.

Hi, good blows probability of injury of any car that the governor's ever tested.

Looking ahead, we expect to produce so even more model threes in Q4.

And I expect that trend to continue into the Q1 and we're excited to bring all three to Europe and China early next year, given up the market for midsize payments that adds and those region is even larger than in North America.

I said before that we must prove that tells it can be sustainably profitable.

But this quarter was an important step towards that and I'm incredibly excited about what lies ahead.

So says.

Yeah just.

So so proud of it tells the same or customers.

Really appreciate it.

Supported by long term shareholders and.

Yes, what they're about <unk>.

The papers so appreciate it.

Sport.

What is actually going to are difficult time.

Right.

To start with the vehicle safety Madonna, who is in about a lead vehicle safety engineer.

We look for north country for a long time, what and how many others have been there was like regimen.

Deadliest 10 years.

Well.

So [laughter].

I've been working so Don for 10 years or was that so many conversations on vehicle safety.

[laughter].

And.

But it was.

We are really good try to go the extra as well with vehicle safety.

No not just.

Like as a series of government mandated tests, but you know what companies. There is there the gaming system. So that they know where the disciple impact is going to be the strike, but right in that position.

We like Okay, what does the weakest point in the car, but after that position. So is the actual safety is not fully captured in the taking the tests because we as he game the system.

Uh huh.

Thank you Lisa just trying to give you a very sick of back you don't know what my so yeah [laughter] like I said guys dislike beneath them extremely video happy to mention Lucky that takes drought really sick, but very passionate and nobody hardwood individuals and that's essentially supposed to no problem. So that's really important for us and ultimately partners.

These or physical mission statement on safety, because why do you want to Louise safety has been you probably the park in fact or what I want to Hieko not just for electrically anyway. He competing yeah. That's fundamentally difference differentiates us so we essentially helps us to keep.

Adding new features a new safety technology, and that's really important as deck shows in moderately they've just to think that you have oh. So the fact that we have typically eco design and architecture useless, a fund them with her but if we all are traditionally.

That makes good of for example, because if you have a block of it did into fright, where do we can we can work with using yeah pretty much open architecture as a friend and a whole effect that you how all the.

Good luck, hi worked age and motors and all of the almost below the symptoms that I would be if the week, though right you said Louis property for usefulness yeah.

Just because they had been.

I think potentially we have you done on our side garlic, and having I didn't understand is definitely the way to go exactly so easy live to see the is the best of luck, specifically talked with water three I'm excited to see this of test actually forecast for one friend through two side and one dollar pest and if you've got it'd be calculating how can we.

Distinguish.

In the feist on that or somebody would equal that I'll begin by stuff, Yeah, and if you look at the five star there was there.

Yes, exactly so if you look good then that is the depicts we came up with which is part of youth and kept repeating itself as a loaf, Bob or gifting, Judy and why was that he has the lowest just to give you a context that are totaled 900, but let's leave those fiscal 2011, which are being greater.

So the fact that modest that he is the best among all the 900 and Lucky Threeq of the exact.

With that speaks a lot of you know very happy to say that a lot of because what you were not stopping you like no. Yeah. Why do we elected Louise list is wholly can make use of the active safety and autoplay features and make it you wouldn't want improvement. So the next area that we are focusing on hoping to get it active and passive safety.

So when Nics data you have challenged which we would improve for sure.

Yes, it's worth noting that the safety extends to not just people what car, but also if desperate correct, yes. So.

Not having a big engine walk in the private car is really helpful. So because if you.

The car would hit a pedestrian what we'll get active safety next because the divesting. It's obviously a lot to hit a car pedestrian the effect of.

Hi, good can it can dance so far it is really helpful.

'cause it ends up being like sort of.

I could have understood buckets like it like a like effectively I would like a it has if you just like you don't have a rock other because that's very helpful. So is it helped us forensic and for a specific people in the car and it then.

Thank you have like a head on question with another car the extended sort of troubles on the of the Tesla.

That's all three is helpful to shoot for people in the Tesla and the people in other car.

So such as you know people in the car.

Nick Bad one night them, which is essentially how we look good the deal works. If he took all this being an important element for the long. So if you look at the order, but well be sure. How we handle the same supported by the fronted later because it's not part of it cap rate there just to show holding <unk> order level.

Reacting to make sure you still were 50, yes, that's really important exactly sort of it but.

Like as he gave us a feel like there what is the what does the was wave it but the car could be hit.

Just sort of strength, where we know the tests will happen in that kind of thing.

So.

Obviously, we're all in these cars are present.

The car so we care about safety electrical like safety is boring, but not Tesla.

So thanks so.

Thanks for your two decade of a hard work through the rest of books of a safety team.

And.

So with that the that somebody wants to autopilot.

And.

Got it just give an update on sort of ore deposits off or.

Yeah, great customer of ours.

We will soon begin to roll out the teams most advanced autopilot feature ever navigate on autopilot in our last release, we watched and you said of neural networks that combine together provide a view of everything happening around the car with navigate on autopilot will use information to understand exactly where the car isn't the highway system and automatically change lanes handle Forbes and take high curvature exits to follow enough route.

Initially will require drivers to confirm Wayne changes using the trying to signal before the car moves between Adjacently future versions will allow customers to waive the confirmation requirement that used to.

One area that I personally really excited to build on this improvement is active safety with the advancement of neural networks covering 360 degrees of view around our car we provide a level of constant vigilance that humans just can't ultimately the should allow us to warn even intervene for an enormous percentage of modern accidents and ship these improvements as software upgrades to our existing customers.

We have a lot of.

This is all the time in the.

In the data where the call we'll do.

Automatic braking about save.

Hey, good aspirin or.

Yeah, I know the car impact SAP is okay. All the time, yeah, yeah. Good for every day.

If you use an incredible work here and by bringing up more of the cameras around the car. We can a technique as they come toward us not just directly in front of us yeah.

Yes.

Hi, This is Ben the hardware three design is continuing to move along.

Over the last quarter, we completed a qualification of the silicon in qualification of the board.

We started the manufacturing line and qualification of the manufacturing line, we've been validating the provisioning flows in the factory.

Built test versions of model S X and three in the factory.

To validate all the finish of the parts and all the reasoning flows. So we still have a lot of work to do in the teams are doing a great job and we're still on track to having ready to go by the end of Q1.

Great and the that'll be.

On at roughly 1000 set decreasing and.

I just think your body.