Q1 2020 Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Alpha that first quarter 2020 earnings Conference call.

This time, all participants are in listen only mode.

After the speakers presentation, there will be a question and answer session.

Asked the question. During this session you want me to press Star one on your telephone.

If you acquire any further assistance please press star zero.

And the conference over Q Speaker today, Jim Free Atlanta Director of Investor Relations. Please go ahead. Thank you Candice.

Good afternoon, everyone and welcome to alphabet first quarter 2020 earnings conference call with US today are Sundar Pichai in Ruth Porat.

Now I'll quickly go over the Safe Harbor.

Some of the statements that we make today regarding our business operations and financial performance, including the effect of the Cobot 19 pandemic on those areas maybe considered forward looking.

Such statements involve a number of risks and uncertainties that could cause actual results could differ materially.

For more information please refer to the risk factors discussed in our most recent form 10-K filed with the FCC.

And then our form 10-Q for the quarter ended March 31st 2020 expected to be filed with the FCC later today.

During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in todays earnings press release, which is distributed and available to the public school at our Investor Relations website located at a B C Dot X Y Z slash investor.

And I'll now turn over the call this into.

Thank you Jim I'm good afternoon, everyone.

When I last spoke with you in early February no one could have imagine how much the word would change and how somebody.

Our thoughts are with everyone was being impacted by coal would 19, especially those who have lost loved ones or their livelihood, it's a challenging moment for the world.

Sure. It all we gotta incredibly grateful for all up they essentially workers on the front blind spots. This crisis.

From healthcare workers and first responded.

The grocery store clerks and delivery workers.

The teachers grappling with new technology to help children don't remotely.

To all the scientists and researchers working hard to double up vaccine and treatment.

And many others, who are leading through these difficult time.

Thank you.

These people for less with toll and show us the power of human recipients will need that energy and resolve the month in years ahead.

Today, there's still a great deal of uncertainty regarding the pasternak already.

But there are some things that begin to understand better, but the patents b or C.

For example, it's clear from data that people are being more cautious.

Seeking authoritative advice and guidance to predict that family's health and safety.

I returned to normal economic activity depends on how effectively societies managed to spread up the virus.

There's no one size fits all and the timing and pay so February will be from location to location.

There's a long time effort.

It's also clear that there's the first major pandemic taking place in their digital world.

Many parts of the economy or else able to continue some semblance of normality, thanks to advances and remote work online shopping delivery options home entertainment and telemedicine.

At the same time newer technologies like AI, Bluetooth exposure notifications and Threed printing are being used to help fight the disease head on.

It's not fear that once they emergency as past the world was not the same.

Some social norms would change and many businesses are speaking to us looking to reinvent their operations.

We've seen that the most pressing concern of small and large businesses right now this business continuity.

Solving for issues like employee safety.

Dramatic falls for so just in demand.

Flight chains and managing remote workforce.

Ultimately, we'll see a long term acceleration of movement from businesses to digital services.

Including increased online work education medicine shopping and entertainment.

These changes will be significant and lasting.

Given the tough challenges. So many are facing it's been a huge privileged to be able to help people and businesses at this moment.

In today's call I'll cover four areas.

First I'll mention some off the ways the of marshaled, our resources and product development to help.

Second I'll talk about how people are using our products are this unprecedented moment.

Today.

I'll talk about our business.

Especially our advertising business, which was significantly impacted in the last few weeks at the corner.

And I'll close with our investment plan and focus for the rest of the.

In the early days of the crisis, we weren't able to put in motion number off if lets quickly.

As a testament to strategic areas that'd be invested over recent years products that people trust, our technical leadership and innovation deep partnerships highly skilled workforce.

Scaling roughly and so far operations.

I've been powerful these efforts and what they say about our company.

I'll give just a few examples.

First we've been working with health care providers researches authorities and communities.

Hello combat the white.

Our community mobility reports health authorities see not brigade, how social distancing requirements are working.

Very earliest <unk> thousands of people in California, and that's partnered with Rite aid to bring free testing to eight additional states.

Google Cloud this forming deep partnerships, such as with leading health care provider at C. healthcare Dawn defend data around ice you bet availability ventilator supplies and test for us.

And you may have read about our exposure notification partnership with Apple designed specifically and carefully to protect uses privacy, while helping public health authorities and governments manage countries reopening.

Second.

We are working hard to provide accelerate an authoritative information to people using our services.

In search we have launched a number of features such as up to date answers from health authorities and remote medical care options.

On you tube, we are quickly removing content that violates policy and raising authoritative content from news organizations and exports.

Up to last week, our cobot 19 in full panels have had 20 billion impressions.

Third we are playing a role in supporting businesses and workers that are hurting because of the downtime.

In March we made a commitment upwards of $800 million to support small businesses and crisis response efforts through a combination of grants.

Small business loans and that credits.

And the Google News initiative, it's offering financial support to thousands of small medium and low cooking is publishers to a journalism emergency really fun.

We've also bathed AD serving fees for news publishers globally on AD manager for the next five month.

Turning to the way people are using our products.

People are relying on Google services more than ever.

As a strong but I could mention off the value of for products, particularly in important enogen moment.

As a few examples we've seen a significant rice in search activity to put it into perspective in the U.S. current I'll, let us related search activity at its peak was four times greater than during the peak of the Super Bowl.

People are spending significantly more time on the Android apps downloads of apps from Google play rising 30% from February to March.

Your to watch time, that's also significantly increased one area in particular is life streams I Hope you saw Andrea boat show the on Youtube live on Easter, which has had over 39 million views it was truly beautiful.

Hundred million students in educators are using Google classroom double the number from the beginning of March.

We've seen a massive increase in demand for chromebooks.

Analysts have reported a 400% increase during the week of March 21st year over year.

In schools and businesses in particular are using our secure videoconferencing platform meat.

Last week, we surpassed a significant milestones are now, adding roughly 3 million new uses each day and I've seen a 30 fold increase in usage since January.

That are now over 100 million daily meat meeting participants stay tuned for much more.

Turning to our business, let me touch on our performance this quarter.

No one was in many ways the tale of two quarters for our advertising business. The first two months of the quarter a strong.

In March we experienced a significant and southern slow down an ad revenues.

Timing of the slowdown correlate it to their locations and sectors impacted by the wires and related shut down orders.

As the impact of covert 19 came into view be delayed some add launches and prioritized supporting our customers as many I'd just to their strategy.

We are focused on products very can help most had prices and merchants during the crisis.

For example, under our new leader of Commerce spend it already last week, we announced that merchants can list products and Google shopping for free.

It's been widely rolled out in the U.S., but more countries to come and the response has been positive.

Overall recovery in the AD spend will depend on a return to economic activity.

Our two key aspects of our business that give us confidence about the future.

First as we saw after 2008 went up the strongest features of search the studies can be I've just quickly. So it's relatively easy it to turn off and then back on and marketers seed us highly cost effective and ROI based.

Again, our business is more diversified down it was in 2008.

For example club.

In the public sector, we are helping governments deliver critical health and social services.

We are supporting the state of New York.

New online unemployment application system has it deals with a significant increase in demand.

In retail be of health Loblaw went off Canadas largest food retailers and wayfair scale to support exponential traffic increase.

We are helping communication companies adapt to new behavior patterns.

For the phone is using Google Google cloud platform to help but analyze netbook traffic flows to keep everyone connected and be a helping unity technology keep real time online games stay up and running.

Institutions like Lloyds bank, our digitally transforming their businesses and be a helping even more businesses to the same through new partnerships with accenture eight TNT and piece system.

We now have more than 6 million paying G suite customers.

G suite is helping Netflix and German manufacturer.

Case up compressors transmission quickly to remote work.

Why the Twitter.

LP fly retailer snacks, and Italian bank Creedon are using meet for things like all hands and customer meetings.

Elsewhere across the business.

You tube subscriptions continue to grow.

The team is launched EWC kits in 15, new countries around the world since the beginning of the year.

And rolled out new features to make cuts focus channels safer.

Android previewed Android 11, which includes seamless fiveg connectivity and a smarter keyboard, but the faster messaging experience.

And as I mentioned, we've seen significant growth in play.

There are now over 2.5 billion monthly active pay devices.

Right.

And then hardware we saw a decline in device activations in the quarter due to falling consumer demand globally.

What I'm excited about the product road map ahead for the year, including yesterday's launch of pixel butts to.

Finally, moving onto our focus for rest of the year.

We are taking a long view and continuing to invest in a long term priorities.

But I being thoughtful in the short term.

So we made the decision to slow down the pace of hiring for the remainder of 20 to 20.

While maintaining momentum in a small number of studies you care to yet.

We had also recalibrating the focus and pay so far investments in areas like Datacenters and machines, and Nonbusiness essential marketing and travel.

We'll also continue to thoughtfully manager other bets portfolio.

They more raised $2.25 billion in its first externally investment drown a terrific validation of their technology and long term business model.

Thing fall, a surgeon deliveries and new users increasing its daily volume fivefold with great momentum in test programs in Australia and Virginia.

I'd, Google will continue to be focused on four key areas that I outlined in the last earnings call.

First creating the most helpful products for everyone.

Particularly at the time or people, who rely on us for information work education and entertainment.

Second providing the most trusted experiences for our users.

This concludes our efforts to tackle misinformation and digital threats.

Hi, solar cell work to safeguard consumer privacy.

Third executing at scale.

I've been proud of how we continue to work so cohesively and productively.

Even with a distributed workforce will continue to build on the internal tools.

Support systems and infrastructure, we have built over the years.

And finally, creating sustainable value.

We'll be optimizing the way our data centers work and prioritizing strategic areas of investment bad we need to support our users and partners.

Let me express my thanks to our employees for their herculean efforts under these difficult circumstances.

Why did that road ahead for everyone. It's uncertain, we'll continue to support our users communities and partners.

And Bill all emerged together from this moment. Thank you and please take care everyone overdraft.

Thanks and there.

Our results for the first quarter are a tale of two corridor with strong results across our revenue line for January and February followed by and brought to climb in March and our advertising revenues.

Government globally instituted stay at home orders in response to kind of cool.

The same time, even through March our non advertising revenue line maintain their strong performance.

Particularly Google cloud.

I'll provide more details on the impact that the crisis as I review that Google segment revenue result, and conclude with an update to the outlet that I shared on our fourth quarter call.

Darren I will then take your question.

Starting with consolidated Alpha that results in the first quarter. Our total revenues were 41.2 billion.

13% year on year end up 15% in constant currency driven by search you too and cloud.

Details and alphabet consolidated revenues by geographic region are available in our earnings press release.

Short advertising results reflect in large part the nature and timing of actions around the globe in response to cathedral pool.

The decline in Asia Pac with more muted. It then what we had seen in the rest of the world given me on even impact of kind of it as well as the composition of our revenues in the region.

The impact in the rest of World began later on with more acute by the ended the quarter.

In terms of the foreign exchange impact exchange rate movements resulted in a modest headwind to reported revenues.

Regarding our T. expense lines on a consolidated basis total cost of revenues, including huh with $19 billion up 19% year on year.

Other cost of revenues on a consolidated basis with 11.5 billion up 26% year over year, primarily driven by Google related expenses.

The biggest factor here again, this quarter or cost associated with our data center on other operations, including depreciation.

<unk> content acquisition costs, primarily for you to advertising supported Concorde.

Followed by content costs for you to TV and our paid you to music or premium subscription services.

Operating expenses were $14.2 billion with headcount growth being the largest driver of year on year growth per R&D on sales and marketing expenses.

For do you know the biggest driver of expense growth with a trip they attributable to a reserve for estimated credit deterioration as a result of collateral pool.

Stock based compensation totaled 3.2 billion.

Headcount was up 4149 from the fourth quarter.

Again, the majority of new higher software engineers and product manager.

Terms of product areas, the most sizable headcount increases where again and Google cloud for both technical on sale throw off.

Operating income with $8 billion down 4% year over year, excluding the impact of the T. fine in the first quarter of last year for an operating margin of 19%.

Other income and expense with a lot of $220 million, driven primarily by losses and equity securities.

We provide more detail on the line items within Oh wining in our earnings press release.

Our effective tax rate with 11.9% <unk>.

Net income was $6.8 billion <unk> earnings per diluted share were $9.87.

Turning now to Capex and operating cash flow cash Capex other corridor with $6 billion, which I will discuss in the Google segment results.

Operating cash flow with $11.5 billion with free cash flow of $5.4 billion.

We repurchased $8.5 billion of our shares.

We ended the quarter with cash and marketable securities of approximately $117 billion.

Let me now turn to our segment financial results.

Starting with our Google segment.

Revenues were 41 billion up 14% year over year.

Well now go to the individual advertising revenue lines.

Starting with Google search and other advertising revenue.

We generated 20 point $4.5 billion in revenues in the quarter.

It was up 9% year over year. This reflects strong year on year growth for the first two months of the quarter.

In March revenues began to decline and ended the month at a mid teens percentage decline year on year revenues.

Although users search activity increase.

Their interest shifted to left commercial topic.

In addition, there was also reduced spending by our advertisers.

You too the advertising revenues were $4 billion up 33% year on year.

Significant you to revenue growth persisted until late in the first quarter with different performance trajectory for the brand and direct response component.

Direct response continued to have substantial year on year growth throughout the entire quarter.

Brand advertising growth accelerated in the first two months of the quarter, but began to experience a headwind in mid March.

As a result by the end of March total you tube adds revenue growth had decelerated to a year on your growth rate in the high single digits.

Network advertising revenues were $5.2 billion up 4% year on year with healthy year on year growth for the first two months of the quarter. We ended March at a year on year percentage decline in network revenues in the low double digits.

Turning to Google cloud, including TCP, and T. Sweet revenues were $2.8 billion for the first quarter up 52% year over year, driven by significant growth at TCP and ongoing strong growth at Ti sweet.

Once again the growth rate of GCP was meaningfully higher than that of cloud overall.

GCP growth was led by our infrastructure offerings, and our data and analytics platform.

We're pleased with the ongoing growth in T. suite, which continues to reflect growth in both seat count on average revenue per seat.

With respect to the implications of the global crisis for Google Cloud, we're proud of the accelerated traction we achieved across sectors.

Including public sector, and health care for disease monitoring and control working with leading retailers on demand forecasting working with companies across media and communication to enhance their customer surface.

And across industries.

Apply tayne optimization.

In the first quarter other revenues were $4.4 billion up 23% year over year, primarily driven by growth in you tube non advertising revenues and play.

You too contribution to other revenues benefited from subscriber growth across its various offering.

Within play App revenues continued to benefit from strong growth in the number of active buyers in the first quarter. In addition in the latter part of the quarter. We started to see an increase in user engagement in app as well as in digital content.

Oh traffic acquisition costs were $7.5 billion or 22% of total advertising revenues and up 9% year over year.

Total Tac as a percentage of total advertising revenues was down slightly year over year, reflecting once again, a favorable revenue mix shift from network to Google properties.

Google operating income was $9.3 billion up 1% versus last year and the operating margin was 23%.

Google accrued capex for the quarter with $5.7 billion, reflecting investments in data center.

Followed by servers and office facilities.

Moving onto the performance of other bets for the first quarter revenues were $135 million, primarily generated by fiber and barely.

Operating loss was $1.1 billion for the first quarter.

Let me now conclude with our thoughts on the impact of the global crisis on our revenues and investments, including an update on the outlook I shared on our fourth quarter earnings call.

We remain optimistic about the underlying strength of our business over the long term on a daily basis, our products play an important role for consumers and businesses globally. This has been evident through out the crisis and the usage metrics that sundar referenced earlier.

Where humboldt that users continue to turn to us as much as they do at a time of global need an uncertainty we take that responsibility very seriously.

Users clearly, our depending on us to provide useful and accurate information.

They are looking to Youtube for information education, and entertainment constantly that they study create and work from home.

They are using our G suite products to collaboratively communicate connect and work.

Although users may not be focused as much on purely commercial activities right now over the long term the value we provide to billions of users globally serves us well.

Our previous investments in technical infrastructure ensure that we have the capacity and resilience to meet the increased demand from our users in this extraordinary time.

We are redoubling, our efforts to help our advertising customers and partners by sharing insights and developing new tool to keep them connected to their customers and help them be best positioned for recovery.

In terms of more specific product points I'll start with search advertising, where our financial results are driven in part by users search behavior.

At the inception of the crisis the increase in user interest with for information about covert 19 and related non commercial topics.

We have seen some very early signs of recovery and commercial search behavior by users.

It's not clear how durable or monetizable this behavior will be.

In order to gauge the ongoing potential financial impact to our business from kind of at 19, a key signal to monitor is macro economic performance, which has tended to be correlated with advertising spend.

As of today, we anticipate that the second quarter will be a difficult one for our advertising business.

As we moved beyond the crisis and the global economy Normalizes. This should be reflected in our advertising revenues, but it would be premature to comment on timing given all the variables here.

In terms of Google Cloud, we remain very pleased with the execution by the team reflected in the ongoing pace of customer adoption of both GCP industry specific solutions and G suite collaboration tools to help businesses operate efficiently and effectively.

Moving on to profitability.

Well pack and content acquisition costs are obviously tied to revenue is.

There is a sizable percentage of items and other cost of revenues that are generally less variable in nature, such as depreciation and operations cost of our technical infrastructure as well as for activities like customer support and content review.

Much of our operating expense, it's also not directly correlated to changes in revenue.

Given that we're faced with a global crisis of uncertain depth and duration, we have been focused on taking steps to enhance efficiency, including slowing the pace of hiring and some categories of marketing it spend as well as further enhancing machine utilization.

More specifically with respect to the pace of hiring last quarter I indicated that the rate of head count growth in 2020 would be slightly higher than the 20% growth in 2019.

We now anticipate a deceleration in head count growth that should start to be visible in the third quarter and continue into the fourth quarter.

Although we are focused on these and other steps to moderate the overall pay seven definite we remain committed to the long term opportunities for which we are well positioned. So we will continue to invest in these areas, including search machine learning and Google cloud.

Finally with respect to Capex.

Fourth quarter call, we shared our expectation that investments in both technical infrastructure and office facilities would increase compared to 2019.

We now anticipate a modest decrease in the level of total Capex and 2020 compared with last year. The biggest change in our outlook. It's a reduction in global office facility investments due to both the knee deposit most of our ground up construction and sit out in response to cope with 19 and.

Decision to slow down the pace at which we acquire office buildings.

In terms of technical infrastructure, we expect a moderate reduction to our forecast relative to the beginning of the here given the impact of covert 19, a data center construction delays as well as the benefit of our ongoing focus on server efficiency.

Overall, we anticipate technical infrastructure investment to remain at roughly the same level as in 2019 with relatively more spend on servers, then I datacenter construction.

Thank you and centre and I will now take your questions.

Thank you as a reminder to ask the question you will need to pest star one on your telephone to withdraw your question. Please press the pound key to prevent any background noise. We ask that you. Please meet your line. Once your question has been state it.

And our first question comes from Eric Sheridan from me. The S. Your line is now open.

Thanks for taking my question Colin So she could well what is the one of the gene there.

Yes, two questions if they can warm the only comment with respect to direct response out which I've been on Youtube, we won't get a little more color on how a direct response advertising is dead units continue to evolve and perform and how advertisers are using those AD units as part of the broader advertising goals.

Maybe root for you I'm on the comment on extending to just when we spend a little bit of how much of what your messaging on expenses is that wyszynski games that you were in an important 2020 before we got to coordinate <unk> versus elements of the cost structure that you reexamining as a result pit Doug. Thanks, so much.

<unk>.

Eric Thanks, Thanks for the vicious we are on on you tube direct response.

We definitely are you know seeing traction there.

Thank you know I think an area of entered really works well for example is app installs. That's a great example effect gaming.

It's another good example effect so to be are working on it trading and making the formats. We're better so that you know it applies to more context this wall.

But in general I think businesses are learning to adapt you you know obviously, we've had great success with search and so we are bringing a lot of those learnings and you know you're shutting it but with their customers and so you know you we expect to see more traction there over time.

And on your second question I like the way you framed it yes, we do have efficiency efforts that we started a that we had going as we enter this here, but as a result of what we're seeing and they environment.

Our view less that we shouldn't really double down on those and so when we go through the various areas that I mentioned, we had started here with an expectation about really optimizing head count around the various areas. What weve determined is we're going to at this point slow the pace of hiring to be very clear we are continuing to higher.

But were slowing the pace of up hiring and that's helping as we're driving the you know a deeper look into how do you optimize within each area.

The same is true for example, and in some of the comments on.

Marketing <unk> you know, we we are continuing to invest to marketing as you know well sales and marketing line. The majority of it is head count related and we do continue to invest here in ads and in particular in cloud as it relates to the marketing component, namely ads and probably less than we did reduce it relative to.

Our plans in the beginning of the year and we continue to have a healthy budget for ads in parallel, particularly in digital support many business areas, but as with the other areas of investment, we're really focused on optimizing across products and services and with physical events cancel from up to the year marketing spend is also reduced and so that's an.

Another example, with machines and servers, a we've been focused on a efficiency at the fleet for sometime now this is giving us the opportunity to push that even further so where were looking at the operating environment and saying we should continue to lean into the efficiency programs. We can it does help us free up some resources for the growth there.

With that continue to be a priority, but it is an extension of where we were.

Thanks, so much.

Thank you and your next question comes from Doug Anmuth from JP Morgan. Your line is now open.

Great. Thanks for taking the question one for some everyone for route.

First on door, you just talked about how once the crisis, whose path will do not will see I'm curious if you can just elaborate a little bit more on how you think alphabet comes out stronger on the other side of this downturn and then Ruth maybe taking a question on expenses lose a little bit further.

It does give you any more opportunity to be more discipline you were diligent on costs on the other side as well. Thank you.

Thanks, Doug.

It's a good question and you know we're thinking deeply about it as well in general I would say to high you know the highest level opportunities across everywhere, we see.

You know businesses thinking deeper about the shift to digital and you know and that's true across.

You know marketing cloud.

You know it every place we see that trend and you know and so.

Part of this is making sure our investments Delaware badly with respect to that shift.

So if you look at advertising you know people who in the past.

You may have debated things like you know how do I get virtual Showrooming, you know not really thinking about it a you know people who may have been hesitant to ship their budgets do <unk> or are looking through moments like this and trying to get all that working better cloud isn't obvious area you know every company.

Oh has been thinking about digital transformation Ah, but they are you asking the questions deeper you know for example, if your data center understand a fixed costs through something like this and you doing going through moments like that and you think thinking about the opportunity harder so across everything we do a b surge beat you tube upbeat plate.

Pete cloud, a I think be our investing a to capitalize on this long term opportunity.

And I would say overall them out so but as well when you look at investments like being on being a you know you can imagine a you know the future. These things working while you know can play a significant droll and even even in the limited idiots being decision. We clearly saw it support and shown through a moment like this so.

Your bidding on those are big trends.

And to your other question if I understood it correctly, you're asking about the durability of some of the efficiency efforts.

Yeah. It I think that that the way I would answer that is after I had a decade of growth there have to be opportunities for added efficiency and we've been focused on that for for some time, but painful times like this put a spotlight and on an urgency around.

Taking a bit making sure you're focused on the levers that you have and hopefully those and still the right kinds of health metrics et cetera against what you're managing so.

I would say that the intent most certainly is that that to be serve our are durable and that sent to ensure that we're operating effectively and efficiently as we can be and I just need to reiterate answer and I. Both said this.

We remain committed to investing for the long term. So we're you know we're not compromising where we need to invest for long term growth. We're trying to make sure that each dollar of investment is Ah well managed.

Thank you book.

Thank you and our next question comes from Heather Bellini from Goldman Sachs. Your line is Allison.

Great. Thank you so much for taking the question leap two questions do you actually on first I wanted to thank you for the color around the growth you're seeing it youre exiting the quarter and Niantic Nash and you know there's been some signs from some different partners are different companies that AD spending was still down considerably.

He has actually improved a little bit maybe some green shoots from the decline that you might have been weapon thing at the end of March any chance you can give us some or the type of growth you you've been seeing <unk> for the first you know kind of three four weeks for the quarter. Just you know kind of just to help level.

And then just in regards to the provision you mentioned dingy enabled me to credit deterioration is there a chance you can you can tell us the amount that vision and do you expect to have to do that began in the second quarter. Thank you.

Thank you for those so.

In terms of adds revenue it yeah, they as I said and opening comments.

Our ads doesn't that's a key signal to monitor is a macroeconomic performance, which has tended to be correlated with AD spend and yeah. I think it's premature for me to up to comment on the trend I'm in terms of what we saw in the first quarter. You know they said for search and other revenues they were up 9% year on year for the quarter, but in March.

Revenues began to decline and then ended the month at a mid teens percentage decline in here on your revenues and then with you too we had strong revenue growth until late in the quarter.

When trajectory for a direct response and brand diverged and as I said direct response. That's continued has substantial had <unk> substantial go throughout the quarter, while brand it began to experience a sizeable headwind starting in mid March. So by the end of March total he to adds revenue growth had decelerated to here on your growth rate.

In the high single.

Digits, and then you know for for the second quarter so far.

You know it I think it's premature to gauge given uncertainty in the environment and a few weeks, obviously, it's not a quarter.

So in such an unprecedented crisis I would not want you to extrapolate from just a couple of weeks that being said you know the decline in our search another adds revenue was abrupt in March and although we're seeing some early signs at this point that users are returning to more commercial behavior.

It's not clear how durable or monetizable that will be so you know based on our our estimates from the end of March through last week for search we haven't seen further deterioration in the percentage of your on your revenue clients up for you to direct response has remained strong however, we.

Sina continued decline in brand advertising and it's really too early to add more I think that the main point, though is a few weeks, obviously, it's not a quarter and given it is such an unprecedented environment I would not extrapolate tonys comments for the full quarter.

And then I tell you have the second question yeah. The <unk>.

Sorry that was very helpful. Thank you.

Everybody and then she G.A. you mentioned the quite a good paint the credit provision that you said you took I just was wondering if you could share that it might be an acute later tonight. It will hearing if he could show that it will be and the key label it will be unlucky later Tonight.

Okay. Thank you.

Thank you and your next question comes from Michael Nathanson from Moffettnathanson. Your line is helping thanks, thanks, everyone for Sundar ones. Ruth Sundar you go asked you about how about your priorities you talked about it but I wonder if you just step back and think about what this crisis, we'll do the other side and maybe.

Well, we orienting <unk> Oh your priority, so perhaps where are you would should spend in the long term to maybe take advantage is we're this is going in Ruth we appreciate the color on you tube just wanted you're going to more if you can give you say sensitive.

Q geography is there any difference by they change by geography that really.

Thanks.

You know in terms of overall priorities you know I you know would see.

You know we've always taken a longtime viewed through you know one thinking through the Oracle for things that going you know and.

Deep focus on a high it's an example effect and im convinced for a while that you know those trends will play out into long term and so if anything true moments like that the strong foundation to be built a you know allows us to.

Continue to be able to invest in our long term areas. So he is a good example effect.

The shift or time on computing to I've been computing is something we're gonna be deeply committed to and continue to invest stair climb.

Cloud and you know productivity software for businesses of all sizes.

It is a deep area of investment and so you know so the thesis still domain. So we continue to focus and he read we think the actual work. We're doing is based on deep technology deep computing, our deep comp you know computational scale.

Is the kind of investments, we think still stand the test of time through things like back.

Beyond that'd be a you know actively looking at how user patents are emerging Ah. So for example, you know E. Commerce is an area and you saw us respond a true there's a with the changes to be announced on our shopping property and and going for comprehensiveness, there and with new leadership.

Place.

So you're going to be making sure we work on the user experience there and so when we're looking at ships be it a videoconferencing with Oh go meet and G suite.

And then adopting and investing in those areas as well so that's though you know approaching it.

And then in terms of the geographic breakdown for you too we.

Breaking that down although I think as you know well we have a breakdown for the major regions around the world and to give you a little more color. There you know in mid February.

Revenue growth across the business began to decelerate in Asia Pac although as I noted the decline in APAC was more muted just given the on even impact of 'cause it in the nature of our business across the region and then the impact and EMEA was first evident in mid February with a steeper fall off in March and.

In the second week of March. We then thought results in the U.S. as well as other Americas, Paula shortly but nothing more specific a byproduct.

Thank you route.

Thank you and your next question comes from Fine No lack from Morgan Stanley. Your line is now often.

Thanks for taking my questions Ive to the first one is just to go back to your comments around the the early signs of improvement and behavior in search I I know, it's early in doing over extrapolate, but just any more detail on the types of behavior, seeing a which verticals, which categories are which geography is rushing serve.

The first sign of of Green shoots on the search side.

And then Sundar to go back to your comments about the shift toward digital opportunities or digital transformation.

He talked to us about as you sort of look back over the last couple of years. It what you've done on the SMB side, and what are sort of one or two of the key hurdles, where you see you really need to invest and build more comprehensive SMB products for post recovery.

You know maybe I can give color both on the SMB in a bit on that site to Oh on <unk> you know on day if somebody.

Side, you know, it's an area we have been investing for awhile and no obviously be have assets both across.

AD words, Google maps school, my business, and obviously, providing them, but G suite and the tools to Oh, you know get there because their business running so I I don't think we have a we have a lot of touch points, but the focus is being simplifying it making it more of a one cohu.

He said easy experience, making sure. It works both from mobile the bid as a truly lighter weight AD words expedient. So that they can get on boarded a quicker and and so reducing reducing the work they need to and also where time, bringing technologies like AI to just make it all much simpler and seamless for them.

And it's going to be a continued focus for us and especially scaling this up and making sure. It works internationally, one less while I don't really via via theater metrics and targets internally and you know we are aligning the teams better to get there and a you know you will see as she has to do more.

On the outside a question a you know to your question about you know maybe I can give more qualitative cover two towards what said earlier.

And you know we.

The good thing about search ads and and you know direct response on Youtube as well, but search problem or at least that.

You know, it's an extraordinarily.

Effective system, it's a transparent system.

Have a very clear sense, if ROI, it's very measurable highly cost effective.

And so we've always seen and be soldiers in 2008 us well people respond in the short term, but that committees also fast when it comes back and so it tends to work. It is very diversified not just geographically by different verticals and even through moments like that.

We do see business is responding to demand shift and you know so we see through our system. If people tell them. They are looking for office furniture, or even pajama us a the system response, right then and so you see the dynamic nature of it I.

I mentioned earlier people are really thinking about the shift to digital so full up under Adsteam are super engaged with our customers helping them.

I think through the opportunities through moments like that you know I gave earlier.

Earlier example, you know if you're.

If you're thinking about cars and you've been hesitant to do virtual car Showrooming now's the time, you're beginning to have those conversations and a deeper way.

There are budgets, which are shifting in certain cases summit for large customers maybe the they've spent a lot of money on live sports. That's clearly on hold so they're looking to shift some of those budgets into a into a you know opportunities they see.

But you know having said that you know there are large sectors of the economy, which are affected or things like travel and our large partners and customers are impacted and so we clearly see the impact of thought and and that's the color a that gave us well.

Great. Thanks Center.

Thank you and our next question comes from Brent Thill from Jefferies. Your line is now open.

Good afternoon.

Curious if you could just give us a little more color crush SMB and enterprise any common thread you saw between those two segments.

You know maybe.

You know, we we have had tremendous momentum on G suite and you know feed fees can you know all of Google works. This way products like Cimino, Google docs or build from the ground up.

To really help people would be productive and collaborative you know distributed work Enron and until we have clearly seeing traction there Google me to seeing great traction and you know I gave a you know I mentioned some use a moment them there, but we have more announcements coming up including a they did the speak and so we are.

We're seeing a tremendous traction and engagement on on GE speed.

On on on cloud a you know the shift to digital as being a deep trend and it's kind of thing people are really.

Really engaged on it a you know I already talked about you can imagine a you know if you're a customer and you have data centers. You know these are fixed cost when you go through moments like those.

And so people are really looking at opportunities there and so our teams are super engage you know, but you know I do want to knowledge, you know <unk> no small a small businesses across across the world are deeply impacted.

As a company we had been on several efforts to support a small and medium businesses and be are.

Going to be deeply engaged with them, but you know I think I think it's a tough.

Joining me at all on and a you know we look forward to working with them to help them through this.

Thank you.

Your next question comes from in Salmon from BMO capital markets. Your line is now open.

Good afternoon, everyone to thanks for taking my question Sundar I wanted to return to those long term initiatives that you walked through earlier in the one that was.

Most close to your core business in the changes that you were announced this week for for shopping.

[music].

Could you explain a little bit more about the reasons for making those changes in extending to free listings are creating the free listings.

And what drove you to make that decision now and then related follow up for Ruth.

Same question essentially but as we think about was the financial impact is such a change.

John This is one of those things, which may qualify as a causing maybe some.

Or some variability in the quarter to quarter rate, but but something that benefits all parties over the long term I think you. So we've often visited these sorts of changes, but any color you can add on sort of the near and long term impact of the Google shopping changes would be great too.

You know so.

You know going through a woman like this you know it's very clear you know <unk> part affords me schoolwork wireless you know people come across a diverse strangers meats and that's true for shopping be spend time discovering.

And you know comprehensiveness really matters. That's all we can have a great user experience and so.

You know as we've been thinking about this space, we realize some visible organic search works for us to truly give that comprehensiveness and the quality of expedience you know we need Oh, you know we need the vitesse catalog possible and then be a good at ranking it then for lighting and matching users to what they're looking for and so it.

It is it is Ah you know made a lot of sense for us and you know just looking through the range of expense.

Being says people, who are seeking out through the coal coal would find to make you know validated it even more and then you know obviously, we had been we've been executing really hard there, but you know leadership in place and and so be saw the opportunity to go back to our first principles and improve the comprehensiveness there.

One of the tricky thinks about when you do that is making sure you know you don't have spam and you're managing.

And giving people good quality experiences and that's where you know our deep or partnership a beat with pay Pal and other providers. So there'd be get the quality signals and really improved experience assay brew comprehensiveness of both of them are.

Going hand in hand, and asked we've demonstrated with search wouldn't be improved organic experience. The advertising experience also gives an opportunity and the system works well and so I'm really excited about this change it is too early and but it's been very positively received and you're going to see us in.

And they experience into Syria.

Deeply you know why do we talk about shopping onto that 80, a better we are investing and building Great Foundation is with goopy and and Oh, you know we have great leadership, there a small we've been executing a volatile where then for the past here and the growth on a Google best being strong and so being able to bring all effect together along with a strong players.

Like Peep out its about will help us give give great experience for our uses here and in terms of a your question about the financial implications of of the effort. Yeah, there's really not lots to add here today I would just say I'm sorry, I Echo centers comment were excited to have the leading the effort in essence, they're set at the outset.

That he'll have the priorities is creating sustainable financial value. When we have a leader who is a demonstrated track record of doing that so we're excited about what he is building here with the team.

Okay. Thank you books.

Thank you and your next question comes from Justin Post from Bank of America. Your line is now open.

Great appreciate it all the advertising a beach in March.

Just wondering your cloud growth is obviously quite stable in a in a low fiftys any impact in March on workloads or slow down in a new customer pipeline and then maybe secondary if you could talk about what's what could be the benefits for cloud as we get to the other side of this more more work from home or just just other.

Things and secular changes in cloud that that might come about from this thank you.

[noise], you know role and cloud the you know the interest and the momentum remained strong you know, you're obviously, making a lot of progress both across GCP, Angie speed and you know when it.

We find <unk> you know our offering so getting deeper and you know we really are helping customers you know from a deeper standpoint, you know so we see old old momentum there are cases, where even though.

The deal trajectories, the same and you know we have the when things are taking a bit longer a you know naturally as you would expect a you know or customers that have impacted for moments like this to so I would say eaten up time too.

Closing some some larger deals or are impacted but you know the companys if anything you know.

All the way at a CEO level lot of thinking about the shift to digital seen a deeper way and I think that's that's a that's longer term trends we are very excited about.

You know, obviously consumption gets impacted depending on the sectors, which companies all rim and you know one so does that have some correlation with biogen drill.

Underlying.

Performance, if that sector and so that's something we'll have to wait and see how would the lumps but are the teams are doing.

Doing well and it's it's and it's an area where we are committed to the of course, we are on and Ah Ah investing BP for the longer.

And you asked about kind of Q2, you know nothing to highlight there I just to reiterate what centers that were really pleased with the Q1 performance for both TCP and de sweeten the dynamics.

Affecting clatter, obviously very different than those from ads and just to build on centers comments with a little more on on G suite and some of our opening comments.

And its work from home environment, what we're seeing as significant interest from from governments and companies looking for work for home solutions. So just to add one more example, Cambridge health plan to the U.S. health system with 140000 patients and they relied on T. suite to support their staff and caregivers drink Cup at 19, helping them connect to cut costs.

Hospitals health centers that are from a home and it's just you know yet another example of.

How how we're able to be present helpful useful in this time.

Thank you.

Thank you and your next question comes from Kevin will be from Evercore ISI. Your line is now open.

Hi, Thanks for taking my question guys, one for Sundar and then one for route.

The other question for you really relates to the resiliency you're seeing the direct response. He's a view two boys are there specific factors or is it a question mix of advertisers there that's sustaining the growth and then the question for route.

Highlighted that you know this is giving you an opportunity to refocus on cost discipline. It looks like that he capital returns by way of buyback were remained quite strong in the quarter has this affected your thoughts on buybacks you suffer turns going forward. Thanks.

You know maybe.

Stepping back a you know I would say, we're all world seems strong momentum on Youtube people are Ah Tony do you tube you know our.

Watch time, that's increased across the board people are looking for a 30 day to use constant.

Viewership on you tube has increased significantly.

You know compared to last year do so in in in many ways through the pandemic people are using.

Using Youtube and and and the trends are global across.

North America, EMEA, and Asia and finished the Pacific as well.

You don't direct response, a you know I do think I think people are you know, it's it's a journey and people who have been investing or seeing a but it is cost effective and so over time.

More people are looking at it our sales teams are doing an excellent job, helping our customers understand the opportunities there and so being able to bring all of Dr. bear indicates the app campaigns, we have done it but the uniqueness enough campaign. So we've just made it easier.

I said, it's a customer not to think about whether you're trying to do this across so Joe you tube and a you know bring a bring to simple holistic solution. So all of all of that is impacting I mentioned gaming go earlier, you know when you think about things like on boxing and product reviews. A you know those are natural home for.

Transactions as well no I already mentioned about all the work we're doing now on on Commerce. All stock you know I you know looking forward to those integrations coming into you tube and working but for us well and so those are some of the a longer term opportunities.

We're working working hard to get the expedient strife in building the foundation for the future.

And then on your second question on capital returns Oh, we believe a share repurchase program for us appropriately sized isn't responsible on the current environment based on our capital allocation framework and our cash balance.

The beginning of the air I indicated that we expected to repurchase shares at a pace at least consistent with the fourth quarter on the remaining authorization and that remains our view for the second quarter.

Thank you and your final question comes from the line makes me from RBC. Your line is now open.

Okay. Thanks in terms of the.

Maybe less worse or are somewhat positive trends at the end you mentioned this recovery will modest move up in consumer.

Commercial search queries have you also seen a small improvement in advertiser interest or advertiser interest and running campaigns. I think you said both of those factors kind of deteriorated in March one of them came back to the other come back to do you also see advertisers starting to come back and then secondly that you to result in the March quarter was phenomenally strong given what happened.

In the month since March two you tube. It was that a comp issue was the comp much easier or it sounds like January February could've been up strong 40% year over year. So is there any color as such as comps easy comps or was there something to fundamentally change the calls that kind of material acceleration. Thank you.

So yeah as I tried to do you really clear in my my response that his question I would not extrapolate from my comments for the full quarter. It's early to getting able in early read and there's really not much more to add and then then what I indicated. So it was you know no nothing more.

Our to add there and then.

Maybe just to reiterate what drew said earlier and I said that you know searched Institute.

People respond to changes in search faster Brian trails. So brand is maybe slower to change both on the downside on the upside and so just a you know much faster to attack as well and so you know I do I think that's worth keeping in mind.

But overall look we see a vibrant system advertisers are.

Definitely very engaged and not looking at it and you know we are seeing active conversations between our teams and our large advertisers where they're trying to understand the demand shifts and how they can respond and so you know overall I see the books from uses uses that are engaging with Google you tube and core products.

So this isn't a <unk> and you know wild obviously, there's an impact on the economy and we're not immune deduct the engagement from advertisers across our products and with our teams as being a very robust.

Thank you and that concludes our question and answer session for today I'd like to turn the conference back over to Jim Threed land for any closing remarks.

Thanks, everyone for joining us today, we look forward to speaking with you again on our second quarter 2020 call. Thank you and have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may now disconnect.

[noise].

Ladies and gentlemen, thank you for standing by and welcome to the Alpha that fourth quarter 2019 earnings Conference call.

This time, all participants are in listen only mode.

After the speakers presentation, there will be a question and answer session.

To ask a question during the session you want me to press Star then one on your telephone.

If you require any further assistance. Please press star then zero.

I would now like to him the conference over to your Speaker today, Ellen West head of Investor Relations. Please go ahead. Thank you Candice good afternoon, everyone and welcome to alphabet fourth quarter 2019 earnings conference call with US today, our Sundar Pichai and Bruce Paratte No quickly cover the safe Harbor some of the statements that we make.

Today regarding our business performance in operations and our expected level of capital expenditures, maybe considered forward looking in such statements involve a number of risks and uncertainties that could cause actual results to differ materially for more information. Please refer to the risk factors discussed in her most recent form 10-K filed with the.

So you see.

During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at a B C Dot X Y Z slash investor and now I'll turn the.

<unk> over to Sundar.

Thank you Adam and good afternoon, everyone. It's a privilege to join the call as the CEO boat alphabet and Google After four years as CEO of Google.

I'd like to start by thanking Larry in sort of be for giving all of us at Google Timeless mission endearing values and an opportunity to have an impact on the world.

There's a lot I want to cover today and I also want to leave plenty of time for any questions. You may have for me into it.

As you've seen in our press release, we've added new revenue disclosures to give greater insight into our business.

Search another Google properties continue to drive greater cells with total revenues in 2019 of $98 billion and strong growth.

Well, it's a really pleased with two off or newer growth areas.

You too reached $15 billion and adds revenues in 2019 growing at 36 person compared with 28.

And it now has over 20 million music and premium paid subscribers and over 2 million Youtube TV paid subscribers.

Ending 2019 at a 3 billion dollar annual run rate and you do you have subscriptions and other non advertising revenues.

Google Cloud ended 2019 at a more than $10 billion run rate up 53% year on year, driven by significant growth in GCP.

The growth rate of GCB was meaningfully higher than that of cloud overall and GCP grow trade accelerated some 2018 to 29 team.

Before I talk about the highlights of the quarter I want to take a step back and give some early thoughts about my approach to managing alphabet and other bets.

We will always taken a long term view enlisting in deep computer science and technology.

Important trends like the wider adoption an application of artificial intelligence.

And be in computing and the more to the cloud underline our investments across Google and our other alphabet companies.

Our work in health care is a great example of how our investments in these areas allows us to deliver solutions across them and pair sector.

Google Cloud works with hospitals, and health care providers to securely manage their patients data.

Data that is much more secure in the cloud done in paper costs are on premises.

Our AI teams at Google also work with partners to apply to help them on their patients, but it's developing better health systems or helping with the diagnosis and deduction of disease.

Among better broader efforts or other bets readily and calico are also partnering with industry leaders do use AI and cloud technologies to improve clinical trials research and drug development.

Our thesis has always been to apply these deep computer science capabilities across Google under other bets to grow and develop into new areas.

The alphabet structure allows us to have a portfolio of different businesses, but different time horizons without trying to stretch a single management team across different areas.

We'll continue to take a long term view managing the portfolio with the discipline and rigor needed to deliver long term returns.

Many ofer other bets are getting to the stage, where it now makes sense for them to partner closely with other players and investors in the industry.

Ramos technological leadership as widely reported.

It's cars of drum and 20 million mines across more than 25 U.S. cities.

Most now serving over 1500 monthly active writers in Metro Phoenix and continue scaling fully driverless by matching early adopters with driverless vehicles and charging for these rights.

I see more looks to its evolution as a business it's focusing on strategic partnerships. For example, it's working closely with Oems and other businesses to build out ride hailing and dairy business lines.

And very leaves an example, if a company in the portfolio that's outside investors Silver Lake and Temasek Hassle us its own board.

We'll consider opportunities for some off or other bets to take some of those steps over time.

Now onto highlights from the quarter first search unrelated Google properties.

I mentioned on our last call our neural network based technique for natural language processing called book has the biggest advancement in search in the last five years. It now impacts 10% of searches and in Q4, we rolled it out in over 70 languages.

In maps, we're celebrating our 15th anniversary very soon and the past year be brought reliable that options to 630 million additional people in locations that previously Battenfeld map.

We added asked many buildings to maps using ml into any 19, that's we've added using all techniques in the previous ticket.

The all these improvements user growth was strong and the range of things people are doing with Google maps continues to expand as well.

The Google Assistant now helps more than 500 million monthly users across 90 countries get things done across mott's makers and smart displays phones DVS cars and more.

Shopping and commerce is another exciting area.

We are making strong leadership hires in this area to help build a thriving business for partner So falls sizes.

For the Black Friday, and cyber Monday holiday weekend, but you had the largest number of daily shoppers on Google Dot com ever in our history.

Throughout the impaired holiday shopping season, we also expanded the selection of products on Google due to a fourx uptick in a number of U.S. merchants participating in our shopping actions program.

Second you.

Speaking of shopping people can now easily byproducts and Youtubes home feed and so its yourselves, making it possible for advertisers to reach even more audiences.

Try searching for Puma Shoestring view on Youtube to see an example.

All all the related content on Youtube like on boxing and beauty videos, there's a format people love and it delivers a simple nvidia buying experience.

A huge focus is continuing our work to keep you up safe for users creators and advertisers.

You may have seen a blockbuster day about our work to promote authoritative content and remote misleading information about the upcoming 2020 elections. For example, we are applying our deceptive content policies to reduce misleading information about voting locations or the census process.

As I mentioned earlier, we're pleased with Youtubes growth in advertising and subscriptions and we're also pleased with the old either so its from other revenue options, we offer creators, including memberships brand integrations merchandise and ticket sales.

Continuing on now to cloud.

We're really pleased with the momentum we are seeing in flat year on year, a number of deals or $50 million more than doubled.

The investments in clouds go to market expansion are resulting in customer momentum.

Wayfair is one of the many retailers who successfully Ryan holiday operations on Google Cloud.

In addition, lows, which began transitioning off its legacy E Commerce system in late 2018 to Google Cloud worked with US during this year speak holiday buying season to improve the stability of their E Commerce site.

What noting at peak time customers in our Black Friday Slash Cyber Monday program used fourx, the compute resources compared to previous here and our platform experienced hundred person uptime.

Lufthansa group, so using our AI solutions to develop new tools that will improve air travel all patients.

The U.S. postal service also chose Google cloud AI to improve business processes and customer experience.

We have recently signed a 10 year agreement could sabre to help them improve operations and develop new airline and hospitality services.

Finally, Google other revenue.

Android continues to thrive I'm proud to announce that over $80 billion as being owned by double up was around the world from Google play showing the popularity of our platform. There are now over 2 billion active monthly users of Google play.

Hardware is still in the early stages of delivering on our vision for ambient computing.

Our home devices demonstrate how this mission can come to life in creating the home of the future with our newness many nest hub Max selling well over the holidays. Following on from the picks up three which sold well last year.

But because of four we continue to build out our capabilities and are keenly focused on execution.

Delivering great user experiences and broadening our distribution.

And our pending acquisition of fit, but we'll give us a foundation in variables I'm excited about a roadmap ahead across our products.

Overall in 2020, our teams that Google are focusing on four key things.

First creating the most helpful products for everyone.

We really focused on ensuring that our products like search maps and assistant are helping people in their daily life.

Second.

Providing the most trusted experiences for our users we are doing lots of fourq to keep improving user privacy and security while also keeping harmful canton off our systems.

Good executing at scale does this would show up as more seamless products across various surfaces and platforms like the Google assistant.

Deeper partnerships and better use of our shared infrastructure.

For example, Activision Blizzard recently chose school as a strategic partner using Google Cloud computing infrastructure.

You do for live streaming and our AI tools.

Putting together these multi product partnerships helps us unlock great opportunities for our partners.

Unfold, creating sustainable value. This means optimizing our usage of computing resources and also growing business. This business opportunities in areas like Youtube cloud play hardware and beyond.

So as you can see there's a lot happening at the company under RIIO sense of excitement and focus.

I want to tanker employees for all the great work and 29 team with that I'll turn it over to really and I look forward to your questions. Thank seller. We're very pleased with our strong 2019 results with total alpha that revenues of $162 billion up 18% year on year or 20%.

In constant currency in dollar terms. This represents an increase of $25 billion in revenues relative to 2008 tool.

I will review, our quarterly and annual results, including our new revenue disclosures and conclude with our outlook sender and I will then take your questions.

Starting with consolidated Alpha that results in the fourth quarter. Our total revenues were 46.1 billion up 17% year on year end up 19% in constant currency.

Our results were driven by ongoing strength in search Youtube and Google cloud offset by a decline in hardware revenues.

Details of Alpha that's consolidated revenues by geographic region are available in our earnings press release.

Regarding our key expense lines on a consolidated basis total cost of revenues, including attack was 21 billion up 17% year on year.

Other cost of revenues on a consolidated basis was 12.5 billion up 19% year over year, primarily driven by Google related expenses.

The biggest factors here again, this quarter or cost associated with our data centers and other operations, including depreciation.

And then content acquisition costs, primarily for you too and mostly for advertising supported content and what has been a seasonally strong quarter for you too but also for our newer paid you to music and premium subscription services as well as you to TV, which have higher content Act.

Position costs as a percentage of their revenues.

These were partially offset by a declining costs associated with lower hardware sales.

Operating expenses were 15.8 billion with head count growth being the largest driver of year on year growth for R&D and sales and marketing expenses.

Headcount drives both compensation and related facilities expenses.

After head count growth the biggest driver in R&D expenses was an increase in valuation based compensation charges and certain other bets.

Stock based compensation totaled 2.6 billion headcount was up 4803 from the third quarter and up 20% over 2008 pool.

Again, the majority of new hires were engineers and product managers in terms of product areas. The most sizable headcount increases where again in Google cloud for both technical and sales roles, including the impact of the look or acquisition, which closed in December.

Operating income was 9.3 billion up 13% year over year for an operating margin of 20%.

Other income and expense was 1.4 billion, which primarily reflects an increase in the market value of certain publicly traded equities as well as a non cash gain from the early transaction.

We provide more detail on the line items within Oh I any in our earnings press release.

Our effective tax rate was there a 0.3% for the fourth quarter and was 13% for the full year the fourth quarter E. T. R reflects the impact of discrete items, including the resolution of multiyear audits.

As you've seen in prior years E. T. R can vary on a quarterly data.

Net income was 10.7 billion and earnings per diluted share were $15.35.

Turning now to Capex and operating cash flow.

Cash capex for the quarter was 6 billion, which I will discuss in the Google segment results.

Operating cash flow was 14.4 billion with free cash flow of 8.4 billion. We ended the quarter with cash and marketable securities of approximately 120 billion.

Let me now turn to our segment financial results, starting with the Google segment.

Revenues were 45.8 billion up 17% year over year and if the of course is on a gap or floating FX basis.

Google search and other advertising revenues were 27.2 billion in the quarter up 17% year over year, reflecting ongoing momentum in mobile and desktop.

You too advertising revenues were 4.7 billion up 31% year on year, driven by substantial growth in direct response and ongoing healthy growth in brand advertising, which remains the largest component.

Network advertising revenues were 6 billion up 8% year on year led by growth in Google AD manager.

Turning to Google cloud, including GCP N G suite.

Revenues for 2.6 billion for the fourth quarter up 53% year over year, driven by significant growth at TCP and ongoing strong growth at G suite.

The growth rate of GCP was meaningfully higher than that of cloud overall GCP growth was led by our infrastructure offerings and our data and analytics platform. We also saw strong uptake of our multi cloud and those offering.

Ongoing growth and G suite continue to reflect growth in both SMB and enterprise segments, and both seat count and average revenue per seat.

The other revenues line now consists of Google play followed by hardware and you to non advertising services, mainly it subscription offerings you to premium you to music and you tube TV.

In the fourth quarter. Other revenues were 5.3 billion up 10% year over year, primarily driven by growth in you tube and play offset by declines in hardware you tube contribution to other revenues benefited from subscriber growth across its various offerings within play.

App revenues had strong growth driven by an increase in the number of active buyers.

Total traffic acquisition cost for 8.5 billion or 22% of total advertising revenues and up 14% year over year.

Total Tac as a percentage of total advertising revenues was down year over year, reflecting once again.

Favorable revenue mix shift from network to Google properties.

Google operating income was 11.5 billion up 20% versus last year and the operating margin was 25%.

Google accrued capex for the quarter was 6.6 billion, reflecting investments in Datacenters, followed by servers and office facilities.

Moving onto the performance of other bets for the full year 2019 revenues were 659 million up 11% versus 2018, primarily generated by fiber and virally.

Operating loss for other bets was 4.8 billion for the full year 2019 versus an operating loss a 3.4 billion in 2018.

Let me conclude with a few observations on the quarter and our longer term outlook.

Based on the strength of the U.S. dollar to date relative to the first quarter of last year. We expect continued FX headwinds again in the first quarter of 2020.

With our expanded revenue disclosures this quarter I'll talk about the revenue and investment outlook for each of these newly disclosed component parts.

First with respect to search and other advertising.

Although we don't report search revenues on a fixed FX basis, the delta between fixed and floating go growth rates at the alpha that level is a good proxy for the effect on search revenues.

Or headwind of approximately two percentage points in 2019.

And our scale, we're pleased with our rate of growth for 2019, and see ample opportunity going forward.

What's exciting for us as we look ahead at search and other Google properties is the ongoing opportunity to support users and advertisers with new adds experiences and improved measurement.

Second with respect to you tube advertising.

A year on year growth rate of more than 30% in the fourth quarter, we're pleased with the ongoing strength than opportunity at Youtube.

We see substantial continuing opportunity in direct response as well as with brand advertisers.

At Sundar shared earlier, the non advertising services at you to mainly from subscriptions reached a 3 billion dollar revenue run rate in the fourth quarter.

We continue to invest across you too to grow over the long term in the AD supported portion if you too we pay out a majority of revenues to our creators reflected in our content acquisition costs on top of that there are other expenses, including infrastructure and networking costs as well as the cost of our content response.

Stability efforts to keep you to save for users creators and advertisers.

We're also investing meaningfully to grow our subscriptions, which have higher content acquisition cost ratios.

Turning next to Google cloud.

We're very confident that there is an enormous opportunity here that plays to our core strengths.

We're pleased with the growth trajectory of GCP, which we see in customer momentum the growing size of the average contract and of course revenues.

The traction we're having with large customers, who are making multiyear commitments with us is reflected in our backlog, which ended the year at 11.4 billion substantially all of which relates to Google cloud.

Given our position as a challenger we're investing aggressively focused on building out our go to market capabilities executing against our product road map and extending the global footprint of our infrastructure focused on 21 markets and six industries.

In terms of hardware as Sundar noted in his opening remarks, we remain focused on the long term opportunity with ambient computing.

We believe our strengths and AI and software give us an advantage and providing seamless experiences to users wherever they are across multiple surfaces.

We've been investing heavily in developing our capabilities in hardware engineering as well as building out supply in physical distribution chains, and we've created a multibillion dollar revenue business in the past three years.

We're looking forward to our acquisition of fit that which will add strong capabilities and wearables and advance our vision of ambient computing for the Android ecosystem.

As we look at the near term product Road map, we continue to execute at a measured pace.

In other bets, we are sharpening our focus on the metrics and milestones against which capital allocation is determined and we continue to assess where external capital is additive to governance and execution.

I'll now turn to the investments, we're making in head count and in Capex to support the growth opportunities, we see across alpha that.

With respect to head count in 2019 alphabet head count grew by 20%, reflecting investment in key areas such as cloud.

Overall, we expect the growth rate of head count to be slightly higher in 2020 due to the combined impact of investment in priority areas plots. The decision to move certain center functions in house as well as from the plant impact of that that that acquisition.

On S.P.C. as a reminder, our full year equity refresh grants are made to employees. During the first quarter of 2020, and you will see the step up in our first quarter results.

In terms of Capex in 2020, we intend to increase our investment in both technical infrastructure and office facilities versus 2019.

Within technical infrastructure at the investments in particular support ongoing demand for machine learning across our business as well as for cloud search ads and you to.

Relative to 2019, we anticipate relatively more spend on servers, then on data center construction.

At this scale of investment we remain very focused on driving efficiency through fleet optimization and tight management of our supply chain.

Finally on capital returns in the fourth quarter, we repurchased $6.1 billion of shares which was more than double the amount every purchase in the fourth quarter of 2018.

As of yearend, we had $21 billion remaining in the program and are focused on executing on the remaining authorization at a pace that is at least consistent with what you saw in the fourth quarter.

In conclusion, we remain very confident about the opportunities across alphabet and in our ability to continue to deliver at the steady pace we've shown.

Sundar and I will now take your questions.

Thank you.

I Wonder if asked the question you on each press Star then one on your telephone.

Withdraw your question. Please press the pound key to prevent any background noise. We ask that you. Please meet your line. Once your question has been stated.

And our first question comes from Heather Bellini from Goldman Sachs. Your line is Alvin.

Hi, Thank you very much.

And I guess I I'm sure you're gonna here, that's a million times night. Thank you. So much for the enhanced disclosure I think with its about Google color alphabet call I've I've been on since I've covered the company's though so thank you again, you've given us a lot of stuff here I just wanted to focus a little bit of ardent GCP and the comments.

You made and either if you want to think about that's for Google Club collectively are just for GCP just given the revenue run rate that you're at yeah. How do we think about D. The gross margin profile of this business is it fair to look at some of the other cloud.

Players when they were disclosing similar run rates to get a sense what their gross margins were.

The reason why your business might look slightly different. Thank you so much again.

Oh, Thank you for those comments, so Ah, yes, first and foremost, we're obviously I'm really pleased with with the momentum here GCP had fantastic revenue momentum in the fourth quarter and as as we noted it's growing it up and meaningfully higher pace than than Google Cloud overall terms of your margin question. You know look I think our view.

Was obviously the competitive dynamics in the cloud market are very different today, we are investing aggressively given the opportunity.

I tried to make clear and in opening comments.

You know given the opportunity, we see and the momentum we're having we we've accelerated our investment in our go to market team and as we've talked about before we've set a goal to triple the size of the Salesforce or also I'm focused on building out our product road map and extending the global footprint of our infrastructure.

Lisa the forecasting to you.

Thank you.

Thank you and your next question comes from Eric Sheridan from either Yes. Your line is now often.

Thanks, So much maybe two parts if I can just wonder if you first a lot of innovation company put on display over the past your Bruce talked in her short afford commentary section about sustainability of growth and outperformance going forward. What are you. Most excited about when you see the company trying to align Oh, what proves consumer.

Our utility along with what continues to drive growth into various segments of the business that would be number one and two maybe for you talked about variability of revenue last quarter going into Q4, but unless I missed that I don't think you used the same board again in Q4, what would you expect thing in terms of variability in Q4 and then.

Equally could give on how that played out or how we should be thinking about variability of revenue going forward. Thanks. So much.

Yeah, Eric I think.

Overall, I presume you mean across everything we do and if that's the case a you know I mean I am me the trends, we're seeing a and you've been investing on it for a while but you know applying it I'm actually driving use cases to users. So for example.

You know using AI to dramatically improve a natural language processing to make 10% of her social so it's better is that kind of opportunity I'm excited by you know when I look at we do see a lot of commercial experiences across our properties speed Searcher Youtube.

And the opportunity to create a better experience there and helps bring more value to our users that's something which we see as a big opportunity.

And I'll across our businesses be Youtube cloud play our hardware are in addition to search a you know we are you know seem strengthen a lot of de serious and and we share a common technological approach across all of them and so that gives us a synergistic way to approach the city as well.

And then on your second question, you know <unk> <unk> and our scale, where we're pleased with the rate of growth in 2019 here in search or ads business overall, and we do see ample opportunity ahead. When we talk about variability of revenue you know the way we've talked about it in the past.

I'm very much holds true, which is where we don't manage for any particular quarter. We manage focused on what's in the best best for users and and with a lot of testing that goes around it and so.

Really the point is there will be variability and and we're focused on continued the continued long term opportunity and we do see that opportunity on the ads opportunity to be significant you know apart from the secular shift to digital 'em. We continue to be very focused on the benefit from better measurement that are at.

AD delivery better user experience. Our view is that all helps grow the addressable market, but there will be variability overtime, because we're very focused on what's in the right long term interest.

Thank you.

Thank you and your next question comes from Doug and met from JP Morgan. Your line is now open.

Great. Thanks for taking my questions I'm, one for signed on one for Ruth Sundar first just hoping you could talk more about Google cloud great to see the 10 billion dollar run rate I'm. Just curious if you can help gauge the progress over the past year than where do you think the biggest areas of differentiation to lie in an increasingly competitive space.

And then Ruth to just give some of your latest thoughts on balancing growth and profitability across the Google segment and other bets as you enter this year do you see additional opportunities to drive a increased profitability without impacting the long term potential of the business. Thanks.

Doug on cloud you know I think.

Maybe maybe a few thoughts on a small to progress we made last year and talk about the differentiation, which you asked about as well.

You know definitely under Tom as this leadership a you know I think we have.

Clearly focused on you know six industry verticals across to anyone markets and so doubling down on those efforts.

<unk>, bringing in a lot of new products and compliance certification, so effectively expanding the time.

Which we serve.

Rick mentioned the team is on track to Triple a our sales force in three years, including bringing in a number of senior strategic hires and supplementing it with a channel partnership program.

I think.

The progress have seen in customer focus with our customer success organization and the contracting framework have all been a great progress for us.

Overall, you know.

Every time, we are in especially in one of these larger deals. They are effectively looking for a technology partner. So differentiation is not just what we bring to table in terms of cloud a better be of differentiated differentiated capabilities.

But in many cases, it's what we bring us Google. So if you take an area like health care all investments, we make in health care across Google and in some cases alphabet.

If you look at Sabre the partnership we can bring to them across our you know experience working travel verticals as well. So I think Oh, you know and over time I also think <unk> AI based industry specific solutions. We are working on a will end up being a differentiating factor as well.

And in terms of your second question investing for growth and how we bounced growth and profitability you know that the approach to capital allocation and the pace of investing EM continues to be guided by the same three drivers that we've talked about previously first and.

And is investing to support the long term earnings growth and the opportunities that we see there second we do remain focused on optimizing investments within each product area and then third as we've talked about in prior calls is investing to support operational excellence and that includes things like driving efficiencies and.

Technical infrastructure, which I spoke about you know when we look at the biggest investment areas within Google We as we've talked about already on this call I'm continue to city focused on investing to support the growth that we see it starts with search in a while also investing to build a new businesses and we've talked.

About a couple of them already today cloud, it's clearly an area, where we're investing aggressively in hardware. We've been investing heavily you know by developing our capabilities in hardware engineering as well as building out supplying physical distribution chains and then in you too as I mentioned in opening comments it.

Thank you to build out our subscription services its still in the early days, there and we're making a sizable investment to build it out taking a long term view here.

So you know we are leaning into investing for long term growth that's been a core principle here and remain such a while looking at where can we optimize within portfolios and where can operational efficiencies be additive.

Great. Thank you both.

Thank you and our next question comes from Brian Nowak from Morgan Stanley. Your line is now open.

Thanks for taking my question I've I've to just to center I thought your 2020 focal points really helpful. Creating the most helpful products for everyone and then the most trusted experience for users [noise].

I was curious kind of focus in those comments on payments and you to even a lot of payment strategies over the last couple of years. So talk about what types of investments are products using you need to really remove friction and drive better payment adoption and then on the you tube side. If you sort of look at how people are using you to now from an engagement perspective.

[noise] what types of changes do you foresee you need to make an order really making them more helpful products driving engagement, even higher on a that you do platform. Thanks.

Well, Brian things on on that on a payment side.

You know clearly you know I spoke earlier about the kind of experience as people see across our properties, including people do come a with them intend to discover alone and commercially engages wall and when they're looking to transact payments ends up playing a critical role a sort of less friction you habit.

Tends to work better so we've been really focused on doing bad and getting more off our uses set up in the right state a we've had a lot of traction with our payments product over the past.

18 months, a we had a tremendously successful launch in India from which we view learnt a lot of features and we are bringing that and we are revamping our payments products globally, and so I'm excited by that drill out which is coming up a in 2020, I think that will make the experience better.

On the you tube side, you know walk, though I guess your questions about you know and.

How are uses engaging with a part of overall you know all our user metrics are very strong the global in nature and increasingly be seen we see newer verticals beginning to grow us wall. So you do buzz working horizontally well at scale and for US It's me.

Sure as an ecosystem it works better sort of the content there. They experience. This there are improving or are we take a condoms responsibility work seamlessly, which makes more content creators engage and and makes it more valuable part product for advertisers as well, but also supplementing the content you see there.

The other types of you know exercising things speed merchandising ticket sales you know when we make it contextually relevant to what we've done in search in search out. So we're time, if he can bring that or do you tube and we see an opportunity I think I think that sets us up although for the long term there.

Great. Thanks.

Thank you and our next question comes from Brent <unk> from Jefferies. Your line is now open.

Thanks, Ruth and in North America was there anything that was abnormally unusual or Facebook had cited some weakness in North America. It looks like your North America number it was relatively weak versus the last a you know for years is or was there any nominally that we should be aware of thank you.

Hi, Thanks for that so that the regional break down also reflects product mix within regions. The U.S. here on your growth rate does reflect a decline in hardware revenues relative to what was a fairly strong hardware revenue growth rate in Fourq, you 18, and how much more to call out than that.

Thank you.

And our next question comes from Stephens you from Credit Suisse. Your line is now open.

Thank you so sundar I guess some of the more cross product lines synergies are showing up in an integrated software and hardware for the stuff like the pixel book.

I know you've come up through the ranks or Google So you're about to be pretty sensitive to the various interest across various teams, but you know we're wondering what you may be looking to do to break down I guess, what might have been more of a side note effort.

And googles history. Thanks.

You know I think you know I spoke about execution at scale and and so for US that means you know you have these product areas, which are focused on the users, but VR setting up teams, which cut across all these areas and make sure. They can bring the synergies and work at scale, so last year to be.

Set up a core infrastructure team, which looks at things like you know how does they use a journey work across a waters a shared infrastructure engineers can use so there'd be don't reinvent the wheel in multiple areas, how can be commonly deploy <unk> across all these products. So I think that's.

That's being a good example of bringing teams together on other big area, but to be missed it like back to breakdown silos is our partnerships are we set up a global partnership steam and our ability to bring a common Google perspective to our big Global partners. It's how does a strike.

Many new partnerships I mentioned Activision Blizzard as an example, and they work can be very synergistic with cloud as well to my point earlier when people engaged with us on cloud, they're looking for their interest in a bigger digital transformation across the board Google Assistant.

It is a great example of because we are focused on the user experience cuts across.

So what are the her product areas as being a great mechanism by which we can break down silos is small, but but it's a great question I spent a lot of time on it.

Thank you.

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

Hi, Good afternoon, everyone I had a two questions one clarifying one for Ruth and then maybe big picture one for Sundar Ruth you a distinguished between the growth of brand advertising and direct response on you tube. A those comments were very clear I just wanted to follow up in after just how you make that distinction between Brandon direct response is it a different pro.

Facing models at the presence of AD revenue share with a creator are both would just be curious on that distinction.

And then two sundar the Big picture one yeah, we have heard others in the ecosystem talk about headwinds from targeting growing certainly there are a regulatory changes. It also apply to you.

You made some some changes to various Google advertising platforms and of course or.

The owner of of two of the largest most important platforms and chrome and the and the Android operating system I could ask your billion things on that last one, but what I'd really like to ask is the big picture question. If we roll up these sort of things for your total advertising business.

How important are changes here to see your topline growth are you seeing.

Notable headwinds from these types of changes in the ecosystem as well thanks.

So on the first one <unk>, we have a again this quarter talked about brand and and direct response and as we've talked about in prior quarters.

You know brand is growing at a healthy pace and remains the largest component of of you tube ads.

Direct response is growing continues to grow at a very substantial growth. The distinction here as the formats for you know in direct response, we're letting brands insert a tailored call to action in the video AD such as signing up for a newsletter scheduling an appointment or down lighting downloading an app or booking a trip things are those sort that's why I.

It's it's that direct response category.

Oh and on a broader questions about headwinds you know it you know it's something.

You know, we always a need to take a look at you know we.

Try to stay focused on.

Uses and our partners and be realized for these things to scale. You know you need to make sure. The ecosystem is working well and and so we are engaged in these issues and and and we anticipate then structurally work on them early on so its how we broadly approach these things and so there's nothing no.

Double to call out other than you know a you know there will be continued.

You know changes in these ecosystems and you know our ability to anticipate and adopt husky a key to the years ahead.

Thank you.

Our next question comes from Justin Post from Bank of America Merrill Lynch. Your line is now open great. Thank you I'd like to ask a whole bigger picture things on the new disclosure. So so first on your two monetization. She me at about 2 billion users, it's about seven or $8 per user just wondering how you feel about that monetization level given.

All that you said, you're seeing there and is there a significant room to raise that when you compare to other social networks and then secondly on the cloud backlog, a very strong number 11.4 versus our I ask cash.

Revenue rate just wondering about how strong the new deals have been that you've signed the last six months sounds like really good traction there and then the profitability of these deals how you feel about that thank you.

You don't of course around a you tube you know I do think there is a lot of opportunity ahead, you're right. It's a block from working at scale.

I think a root spoke a little bit of about brand and direct response, having direct response is a huge growth area for us and and increasingly I think a when you look at the fact that people are consuming a lot of goods and services you know as part of their experience in Youtube, how can we create better commerce experience.

This is also is a big opportunity for us so looking across I think a there is a more room a significantly more room over the mid to long term on monetization levels and so I think we see that as a.

Big opportunity in our investing for it.

On the cloud are definitely you know we are increasingly doing a much larger deals and and you know these deals can sometimes span beyond cloud us wall and they can touch a many areas. So as an example, if youre an automotive company.

Oh, we can be talking to you a cross cloud Android auto in some cases BMO and they all happened to be strong platforms, a partner Subodh rising side as well. So these are large deals and and you know we do want to build these in a sustainable way. So that begins so the partner well and so profitability as being something we're very focused on.

On as well and you know just to add a little more to that you know a where you see.

He 11.4 billion a backlog number it is a you know for US we view it as a way to quantify the traction our that we're having and as you know well in the enterprise face. These these tend to grow overtime and profitability as such comes across the the cohorts. However at the point that we were trying to make into.

Made a couple of times here on the call is we are investing aggressively in crop cloud overall, given the opportunity that we see and the momentum we're having and we'll continue to do so.

Thank you.

Thank you and our next question comes from Youssef Squali from Suntrust. Your line is how often.

Okay, great. Thank you two quick ones first Ruth has a shortened holiday season has much of an impact on your search business in North America, and then Sundar.

As you talk about automation machine learning how much of advertisers search spend is now on auto bidding and how do you think smart buildings effective is effects in spending growth and pricing. Thank you.

So on the holiday shopping season that there's really nothing to highlight there what we find is their seasonal puts and takes in any given period, so really nothing to know.

Oh.

On.

I don't have specific numbers to here, but you know tied here, but you don't effectively we do see significant traction in these areas and advertisers are leveraging the features we have we are bringing your tier beats moderating murder bidding Oh, there's tremendous traction.

With our hybrid I says here.

Thank you.

Thank you and our next question comes from Kevin Murphy from Evercore. Your line is now open.

Hi, Thanks for taking my question I was primarily for Sundar.

As you think about the risk profile of some of your business is like Waymo fairly in health care, how do you manage those risks, which you know likely in a scenario where autonomous cars have some accident or something like that having those in house and the perhaps brand damage that could do to Google versus what you could do if those were entirely separate entered.

Prizes I know, they're all help eliminate the open umbrella, but just sort of big picture, how you think about managing that risk over time. Thank you.

Thanks, Kevin you know we are you know it's the spoke earlier in the Middle <unk> you know part of the reason we are making sure.

We are investing in a proper governance structures. So that if you don't try to scale as a management across these important area. Some of these are.

You know have a regulatory aspects to it we are for some of these bets as well on but at least a great example, we've we've <unk> brought an outside investors people with expertise and setting a proper board structures and governance for these so I think those all help on.

You know will continue to you know a you know evaluate these on a periodic basis and bring that rigor and discipline, but I do think also but gives us a more flexible framework. If you will to both have the independents when we need a but where we can have a common chad.

Synergies like our AI investments bring better basketball.

Thanks.

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

Hi, This is Ben on for Mark. Thanks for taking the question a roof. There just kind of want to double click on something you said before in terms of other bets I'm kinda like a sharpening focus on yes. The allocation. There was that kind of is that kind of signaling signaling more of the same or is that kind of.

Potentially maybe prioritizing.

Investments are more towards like share buybacks.

Stuff like that as opposed to like base I'm trying to ask our should we expect greater rush rationalization or any other bets segment going forward is it more of the same thanks a lot.

So what is a it was added to saying is that when we look at the other bets and execution, we've talked overtime about measuring them against specific metrics and milestones operating business technology.

Financial performance and we and we look at that as we calibrate the pace of investments the approach to investments and we're continuing to do that we're putting up a sharper focus on it at Sundar indicated a looking at where does it make sense you too.

Work with the extra capital to deal with their early as an example, but the bigger point as we continue to invest for the long term and when we look at our capital.

Return approach, it's very consistent with what we've talked about previously the primary use of capital continues to be.

To support long term growth in Google and in other bets and then it's about 'em strategic investments and on top of that return capital to shareholders.

Thank you.

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

Two questions.

Google segment margins looked really strong in the fourth quarter figures, a first time a mix shift actually helped you guys from margin perspective. So rude can you just talk about how how much was up margin increase year on year was from the hardware business dropping off first <unk>, improving or elsewhere and then as you move forward you mentioned that headcounts.

Going to accelerate <unk> isn't grocery your your view, we're just going or more of the study you kind of increased for the second question.

On on you tube.

A lot of discussion here about direct response in part from the opportunity there what percent of Robert I was a advertisers or or barring surge only versus a boring surgeon you to a at this stage and.

It looks like from your new disclosure that you to decelerate a little bit in fourth quarter and any color on or what's driving out relative to the full year like 19 groceries. Thank you.

Okay I'm, so taking the first part of that and in terms of the the operating margin in the fourth quarter. There were a number of discrete items in the fourth quarter last year, a dual tweet team. So that did result in a favorable Google Opinc year on year comparison for this year and as you said the other cost to sales does.

Reflect lower expenses related to hardware in Q4 in particular versus.

Last year, but I think the main point to leave you with is that we do intend to continue to invest aggressively to support growth in the areas that that we already talked about quite a bit on this call in search and cloud in hardware and in Youtube.

In terms of headcounts, you know I tried to break it out in my closing comments that it starts with those areas, putting head count, but behind the areas, where we're investing up for the long term and then we have a couple of additional factors that that are somewhat.

You know expected to boost the year on year growth rate. Yeah. One is bringing some support in house, that's opex neutral on any other is that that that acquisition.

In terms of the third part of your question I'm, just trying to recall that the.

D in terms of or the mix I'm not sure there's much to add there.

Thank you and your final question comes on line of Colin Sebastian from Baird. Your line is now open.

Thank you I guess first just given the focus and new leadership team in Commerce I was wondering if you talk a little bit more about the opportunities you see for innovation there at the transactional part of the funnel and then as a quick follow up on the acceleration and GCP beyond the size of the deals where their particular product areas like.

Query or something else worth worth calling out that might have inflected to drive that acceleration.

Great on on Commerce, you know him I'm really excited build rate easier. He brings a lot of experience. When do you mentioned the transactional part of off the funnel and I think it's maybe a very brings a lot of experienced given as prior work.

But we definitely see opportunity to improve in in the world user experience in terms of how we present, our roussos, the visual nature of fed making that experience more delightful and when people are interested in something you know how do you make it.

More seamless.

To complete the transaction and bringing in deep partnerships.

With merchants and retailers to making that happen. So excited about the opportunity there and are you know and then that's why we are investing.

On GCB you know we did see you know it's been a lot to do with you know bringing to bear a all the resources, we have an engaging well well on these deals and execution that there has been great and it's definitely we see strong traction in Ah Ah data analytics.

And so our strength bears the company is definitely a contributing significantly aspergillus our overall leadership in AI.

Thank you.

Thank you and that concludes our question and answer session for today I'd like turn the conference back over to Ellen West for any further remarks, thanks, everyone for joining US today, we look forward to speaking with you again on our first quarter 2020 conference call. Thank you and have a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

[noise] to today's live stream Tomorrow is teslas Q1 earnings report and today I want to give a preview on teslas earnings and also I want to try to answer the question well.

Tessa survive and thrive in 2020 now I think this is kind of pretty much. The most important question on investors need to hand, I need to answer for 2020 and beyond his test of the type of company that can really like to take advantage has opportunity no matter what the economic situation is and that's the case center.

It can be a great investment spending between to dive into it. If you can go ahead and if you can hear thislife stream. If he can get it done that's a life and that will help me to know that you're watching and also helps algorithm, but also let me know to sound is working for you guys is this is a lifestream is going out life.

All right I'll continue on so we have this huge economic shock that's going on right now in the world economy, and its testing businesses and is testing businesses and dividing up businesses into businesses that are kind of like you know weekend struggling to survive. So you have some businesses that are.

Going into this category here and then you have some businesses that are going to drive in this kind of.

Struggling and tough economic scenario so.

The question is does not fit into this kind of struggling to survive area. We're just tessa become one of the driving companies and 2020, even amongst economic struggle.

All the other Oems, they're pretty much on destined and stuck into struggling to survive.

Hi section here, So you have GM and Ford STW, Honda, Toyota and Mercedes BMW et cetera. So that's the list goes on.

And there's only one automaker at least establish not only here that has a chance to become I think kind of the company and Mr. This economic situation that is test side, we're going to look into why that's the case.

So in the auto market you have a house of pain again major major just an economic devastation and here's the cycle and you've got to understand any step by step to the understand what's happening here. The first thing is you have economic shut down.

So you have businesses shutdown left and right all throughout the economy, and that's causing a lot of losses jobs in unemployment and people have lower income you need to have less money on just goods and services and on extra items like buying another car more people wanted just to continue to stick with their current car hi for next.

Senator your time.

The other question is there's a lot more uncertainty like how long is just gonna take on to overcome right. The economic struggles and so with uncertainty people delay purchases like cars is he going to see the auto market. Just go down on the extremely allots next that will lead to lower auto sales could you bought less money to spend.

And less urgency send people aren't even driving as much as before then you have lower revenue from for the auto Oems.

So they're not selling has many cars they bringing in less money. Then this will lead to lower operating margin or operating profits and that means they have less money to cover their high expenses and a lot of these auto Oems have high expenses there.

Basically hi expenses to operate their businesses and that's going to lead them to have a greater loss right. So while some of these audience, yes. He didnt make profit while the economy is doing well.

The auto Oems, an economy isn't doing well and their revenues.

I think there the first went or.

Do you actually have a great loss and then this leads to a lower investor confidence, meaning people investors are kind of as I'm skeptical of doubtful about this chances of these companies to grow survive and that leads to higher cost to borrow and so for these companies to borrow additional money. This is basically costs anymore.

And then all of this makes it even more difficult for these audio Oh I Oems history on to survive. So here is this houses pain and the whole and thing is it's going to be a struggles to survive right.

It all depends on how long right. This whole economic struggle recession, perhaps depressing goes on for right. If there is a quick fees shaped recovery of war. If it takes a few years to recover on my hunch is that this is just the beginning of a lot of economic pain and you see this cycle and you see a lot of news and struggles from auto Oems.

This is auto market how sick pay.

Alright so.

Today, just like 20 Misguide pulled up this article that Ford projects and adjusted pre tax loss of $5 billion. In this second quarter. It's like yes, and this is just the beginning of pain right.

And you're going to see more and more I think auto ends automakers and now it's you know big losses in the feature.

And he is interesting affords first quarter sales fell 12% compared to a year ago, but if you notice is only until really the need March time period, or so whereas in leasing the U.S. that lockdown started so do you actually only missed out on a few weeks to sell yet they were down 12.5%, which is you.

Probably a ready on a downturn and this crisis just hit now this is interesting.

Says I each as market expects world light vehicle sales declined 22%. This year to 70 million units led by 26.6% fall in the U.S. to 12.5 million users compared to year ago in other words, he's got his 27%.

Drop in auto sales trajectory for the U.S. and that's a lot right. That's a huge amount has lost revenue for these companies and they can have a hard time covering their expenses as a you're looking at these companies on the crane big losses for the time going forward.

All right. So if we noticed before it back in February this is a treat I sent out.

In February they raised money on.

3.5% five year bonds and then two months later in April.

The raising money five year bonds again at 9% right. So you're ready had this whole cycle, where investors are starting to this confidence right. Because these companies are crane grade losses, and is leading to higher cost to borrow that you see in Q4 is case the I've spent between 9% of five year bonds.

Annual rate and now that this is becomes an increased difficult situation, where companies who may have a hard time to survive.

Now Tesla situation is unique and they are fortunate due to several reasons here.

I call. It is a lucky scale right is it for Chen or something that something you know a lot of things are going on in Tessa Savior here. The first thing is I Tesla ended 2019 $60 million in cash basis. This is great for test or they just kind of turned the corner in 2019, the second half of 2000.

18, you saw units you consecutive profitable quarters, you had like you know billion dollar per quarter, so in cash free cash flow.

So it is easy raking in the money and this is actually if there was ever and test those past 10 years for a pandemic to hits like this one and this is probably on a decent time, because tesla had to cash in hand I to begin but then in February Tesla raised an additional 2.3.

Billion dollars in cash.

Right. So you have Tesla and about $8 billion in cash.

And it and this is right before right depend danica hit and so it's actually another creates a kind of what's your just sign for Tessa.

All right number three Tesla is beginning production ramp on the test them out of line, which is teslas most popular vehicle. So in other words.

Before this time before right Q1 or end of Q1 Tesla was just had announced thought a wise.

Practically guarantee that's gonna be this most popular vehicle.

And.

Right when they spend then it hit that's that's when test it starts to ramp reduction. What this means is that even if model S and X and model three demand goes down somewhat they still have a lot of unmet demand from auto wise because they just started production amount of why it's just it's great news and for test production is they're projecting that model why sell as much as model.

Yes acts and Threeq night, so even if Tesla so they say.

You know lessened by 400000 cars last year.

And let's say to demand from auto lie is actually 400000 cars I think is actually more globally. This is just in limited geography.

What's going to happen is Tesla has a lot a room rate to produce and to sell motto why even yes right. Their initial ass ex interest to man goes down a bit I just thought a life.

Last thing that is fortunate for Tesla is the Shanghai Gigafactory, you're saying that factor is ramping production at the made in China model three.

And in March they actually produced over 12000 units right just in March and that's ready as like a 150000 kind of unit per year run rate and so.

China factory is just completely surprising must people and how fast that it's not just being constructed but how fast that is the ramping and had a radio 150000 years prior year run rate. They can pay ramp that you turn into 2000 right for your by the end of year, and they're going to probably and try to expedite the model life production.

Hopefully by the end is there right now its plan for the next year Alright. So Tesla has a lot as things on going forward right now and it's got a strong position going into this pandemic and that's one of the the preconditions for Tesoro to actually become a company is going to drive right and this economic struggle.

So other auto you Oems you've had a struggle to survive yet you have tessa right in a position to drive, especially with growing demand with Mobileye and also to China.

Other auto Oems, you've got shrinking sales look you have 27% right and all them auto market projected to tank in the U.S. so across the board with auto Oems.

Without exception decides to size are gonna have shrinking sales yet, yes, Tessa is going to have growing sales most likely to sodium probably the only automaker with growing sales.

Other auto Oems, they're gonna have to reduce their research and development, they're going to be see how to cut expenses and really go into kind of austerity yet Tesla is able to continue to grow their plans right, they're ramping model why they're ramping China and their hopefully going to have battery day and made just show their plans or ramp gigafactory and so.

He has tesla and this unique position, where they're able to be ambitious while other auto Oems are having to be conservative and having to pull back right a lot of their plans.

Lastly on their audience will also have to pull that anything unnecessary anything that just is not absolutely essential and they're probably going to pull dr. autonomous driving plans and even right now there so far behind.

The yet with Tesla, they're able to continue development to continue to grow their auto autonomous driving features right.

This is fantastic for tests that as well so all of this leads to teslas advantage in the situation and yeah. It's unfortunate for the audio.

Yes, but these risks were already inherent in that business model and in that business at Oems. He just weren't prepared for the next stage and now with this crisis Hitzeman. This crisis is it's just kind of shows that all the weaknesses that we are ready inherent in their business model and in there.

Thanks.

All right. So let's go through some key questions here for a test as Q1 earnings. So we have test is Q1 earnings tomorrow on D.. We these the shareholder letter typically after market close after one PM Pacific time typically.

Usually is between five and 10 minutes, sometimes it can be 15, 20 minutes or so one tiny extended over an hour and that's when they change CFO and then you see if I didn't know the password to upload that are any support but anyways and then threethirty PM Pacific time to get having a conference call with you on must against the key Tesla.

Leadership team.

So here are the main questions that we want hansard or you're not looking for for Q1 into earnings and shareholder letter to the first question is wonderful Tessa restart production at Fremont and we know already that Tessa was trying to restart their production on May force.

And the reason why is this because the bay area sheltering place orders ended on the third however, yesterday, we found out that the bay area shelter in place orders are being planned to be extended pass me forthright probably to the end of me.

And so you're going to revise the sheltering place orders, they're going to loosen up slightly but it's still gonna be insect ineffective and it makes it a big question Mark.

He is well test will be able to restart production in their Fremont factory with the new and revise rate extended sheltering place orders into Alameda County in the area or well test side. The forced to continue their shutdown all throughout may and done start production again in June the problem is if they start production June that's only one.

Quarter left right one month last in Q and so they have a hard time really producing and selling many cars and Q twos sure. They have China that stuff and it's a lot less in numbers and production out there.

All right. The second question here is how has Tesla used the shut down time, meaning.

When the factory shutdown, we know that there have been some workers, they're getting some essential work what has essential for work then has it been like retooling has there been increasing the kind of production equipment and model why have they been able to expedite model why wrap it all under a lot of question marks here like how has tessa.

Taking advantage right other shut down time recently.

Number three is how fast can Tesla ramp model why.

And this is an important question because with demand, possibly getting hit for the model S. Accent. Three it's important that Tesla is able to be flexible and to produce them auto why if need be and in larger numbers and so we want any information about how Tesla is Daniel model, Iran. We know that yeah. This is the big priority.

You are a big priority for this year.

Alright, and number four is how large was China production deliveries D. and 2020. So we know that the production is ramping faster radio 150000, or so annual run rate.

And the question is well China demand also equal that and we will there be enough customers right to do buy of all those cars and if so that could be a grades and actually.

Great and as advantage for Tessa test.

All right number five.

It will Tesla dropped the guidance for 2020 now it actually makes sense for me.

For Tesoro to drop guidance, just because it's a lot of uncertainty when you don't know when you're going to restart production. The safety mind, whether you know, but it's going to be May force or June 4th or so that's a huge gap right of a month or so and so I'd actually prefer actually to assist you in this guidance unless they're super confident that you know they're going to restart production on may 4th and go higher.

Card right and not.

Be subject to any more shutdowns.

All right last question I'm looking for is that every day and is that everyday stuff that happened in may.

And yeah, what's test those kind of approach and if it happens amazed it's good news because it shows that Tesla is still.

Being aggressive and ambitious right with their whole ramping up the new Gigafactory is ramping up as probably new cell production and.

Canadian exciting events to see.

[noise] alrighty. So here are on my Q1 earnings estimates now where they decided to do is I decided to kind of just write it down because I, usually typically do stuff on spreadsheets and I kind of my own can estimates I realize a lot of Tennessee Titans spreadsheet you can get into this.

Thing, where you don't really understand the main kind of key core components right as a company and so a lot of Tenda thing is easier just to write it down in terms of these trying to understand it Warren buffet same is just saying that.

For any company that you invest and you should be able to write down on one piece of paper right. The reasons why you're investing in a company ended companies basic finances. So basically I definitely should do I need it shouldn't have to rely on right a spreadsheet to come up with earnings projections she'd be kind of straight forward. The here are kind of the key.

These factors for tests as earnings.

So first yes deliveries we know in Q1.

Ending March 31st 2020 to assist delivered 88400 vehicles and.

And from that they produced actually about 15000 more than 900 in 2000 vehicles produced.

All right. So the revenue, let's go back the last three quarters to checkout revenue.

He Q1 Q2 2019, the had 95000 deliveries right of cars and he had a revenue of $6.35 billion.

Okay. That's Q2 Q3, you had it.

Deliveries of 97000 vehicles, and then you had revenue of $6.3 billion and then in Q4 2019 and this is last quarter you had 112000 deliveries.

And then you had.

$7.4 billion no. The estimate here now for revenue that I'm, giving is Q1, we had 88000 deliveries. So you basically no is gonna be lower than Q2, and she has to be because Q2 in Q3 had 95000 or 97000 vehicles right.

$6.3 billion revenue or so so it's about let's say about seven or 8000 last yokels.

And you're going to have a lower nonresi times. It about you know average sales price about 45000 550000 per units you didn't have you know a lower.

Revenue prices by $400 million, so I put down a $5.9 billion estimated revenue for 2019 Q1.

So this is kind of the important number here.

All right, let's move onto margin. So the last few quarters Q2 in 2019, you saw margin of 14.5% and then in Q3 as 2019 and what else, 18.9%. We're talking about overall margin now and we test. So you had this automotive margins that you also have like there are other sold.

Sure and services, usually their services or negative margins of combine combining kind of all the margins in Q4, you at 18.8% in Q1, I'm estimating about let's say 18% margin.

It could be actually slightly lower than this but.

The reason why it's going be lower I think is you have a few factors number. One is you have the model why rant whenever you're ramping new vehicles. The first like 2000 vehicles are paying any negative margin is he going to take a hit on gross margin overall and also there were ramping up their Shanghai could factor right and because there's still ramping up you can have probably not negative.

Margin for saying I know, you're going to have kind of low margin you know maybe between 5% to 50% or so during Q1 and so.

It has a negative kind of pressure on margins. So you're gonna have you know, maybe 17, 18% right gross margin or so and that will lead to.

Operating margin or operating profits right, if you take 18% of.

$5.9 billion, you get about $1 billion right of operating profit. So that's the money that test was able to take right. After they sell all their cars if on a billion dollars leftover and now they've got it and pay their operating expenses illicit get their operating expenses.

If you take the average is the last three quarters Tesla has obviously not a billion dollars or so in operating expenses right and this is divided up into R&D and.

Sales General and administration, so I'm, saying, let's say they keep their billion dollars expenses now it could be a little higher could be a little lower.

Next year looking out basically what their operating.

Yeah actually usually get their operating.