Q2 2020 Alphabet Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the Alpha that second quarter 2020 earnings Conference call.
At this time, all participants are in listen only mode.
After the speaker presentation, there will be a question and answer session.
Good question during the session you will need to press Star then one on your telephone.
If you require any further assistance. Please press star then zero.
I'd now like in the conference over to your Speaker today, Jim Friedland Director of Investor Relations. Please go ahead.
Thank you good afternoon, everyone and welcome to alphabet second quarter 2020 earnings conference call with US today, our Sundar Pichai and raise Brett now I'll quickly cover the safe Harbor.
Some of the statements that we make today regarding our business operations and financial performance, including the effect of the Cobot 19 pandemic on those areas maybe considered forward looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially.
For more information please refer to the risk factors discussed in our most recent form 10-K filed with the FCC ending their form 10-Q, four the quarter ended June Thirtyth 2020 expected to be filed with the FCC later today.
During this call we will present, both GAAP and non-GAAP financial measures reconciliation of non-GAAP to GAAP measures is included in todays 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.
During the call over just Sundar.
Thank you Jim and thank everyone for joining.
It took them they've been a busy week and I'm glad to be here.
Hope, everyone, a staying safe and well all of us at Google continue to send our deepest gratitude to everyone on the front lines the panda make all around the world.
I also want to personally thank all our employees, who continued to work so hard to make sure our products and services are available for every one right now people looking for important health information Hardhead business is working to in phone customers to buy opening hours or delivery options or teachers connecting to their students.
The macroeconomic environment caused quite a pandemic created headwinds for our business.
Our revenue declined on a reported basis I, just flat year over year on a fixed FX basis.
Like other companies this quarter, we saw that early signs of stabilization as he uses returned to commercial activity online.
This is true across most of our advertising verticals and geographies.
Of course that economic climate remains fragile.
One thing I'd like to call out is our continuing journey to investing and grow new businesses.
We delivered strong growth in our non adds revenues, particularly from cloud Google play and you tube subscriptions.
This in turn is helping our partners there was a person creators owned revenue and deliberate valuable services to people.
Focused on the steps to build long term value these opportunity.
Today I'll review the quarter by walking through the four key areas for 2020 that you've heard me mention over the last several quarters.
Creating the most helpful products for everyone, providing the most trusted experiences for our users executing at scale and creating sustainable value.
First creating the most helpful products for everyone.
This has been especially important during this time.
Focused on providing locally relevant helpful. In authoritative information about coal would you know where 70 languages and 200 countries.
There's been an enormous effort across search and all our products.
You do for example, engage with public health officials and over 90 countries interfaces patents with locally relevant information in response to cope with 19 Craig.
On Google maps and surge, we now display more than 12000 gold 19 testing centers across 20 countries working with local governments and data politesse to source accurate than helpful information.
Using our technical capabilities via helping people find more information about local businesses, such as takeout curbside updated dollars donations gift cards and virtual services.
But more kids at home, Google play launched a special gets tab, but the only teacher to prove that.
You too, but seeing traction with loan at home I. So that's the virtual some mechanical kids Calcomp Youtube lots of virtual commencement C.
To help Indian Internet users, we announced the Google for India Digitization fun.
Through this effort will invest approximately $10 billion over the next five to seven years <unk>.
<unk> accelerate and participate in India's burgeoning digital economy.
Will enable information in local languages and applied technology Nei three important areas like health education and agriculture.
She'll platforms as the first partnership agreement into fun, and we'll work with them to help millions of users in India. They come on us of smartphones.
Second providing clustered experiences for our users.
Doing even more to predict uses privacy keep information safe and provide high quality information was a key focus this quarter.
In one important update we now said people location history, and Webinars activity to delete automatically after 18 months if the default.
We also integrated password check up into a core security check up to help people detect any incentive that online accounts being compromised.
More than 100 million people have used.
Android 11 beta launched this quarter. Many new features to help people better managed to connected devices.
It contains a significant focus on privacy and security, including more brownie look control or Apple missions and restrictions on apps usage of back on location.
Our exposure notification say pie for Android and iOS Devil up but that will launch this quarter.
Designed to Mpower public health agencies to create apps to help fight the spread of call. It the strongest user privacy save costs.
As of today authorities have drilled out official labs in 12 countries to alert people that they were in contact with another person who tested positive for the widest and addition, isolate and get tested we expect several more ABS to launch in the next week or two including the first state types in the U.S.
We're also focused on election security efforts around the globe, but its are moving coordinated foreign influence operations prevent hacking and fishing at times or enforcing our political AD policies that took quite transparency and prohibit narrow micro targeting.
Moving on now to executing at scale.
All businesses that are adjusting to work from home and we had no exception.
While building products across distributor teams was a new for US this experience allowed us to make good news so for infrastructure investments and productivity tools.
Suite products in particular, but we'll meet I've been absolutely critical and we could quickly reengineered it and made it available widely to help millions of other businesses and organizations connect and collaborate.
One area, where do we have executed really well to improve the user and merchant experience in the last hit a shopping.
We know that beat and merchants faced incredible competition for consumer attention and wallets.
Helping merchants lower their cost and improve that reach and a few weeks.
They can now listed products for free on the Google shopping tab and on search helping them drive more traffic and making artist so it's more comprehensive and useful.
We also recently announced that sellers on by on Google will no longer pay US a commission fee.
Plus via giving retailers more choice by opening up platform to third party providers.
Starting with Paypal and Shopify.
Shopping that's also continued to be a great twofold merchants that new visual features for retailers. So just smart shopping campaigns that let customers know about free shipping.
Continually adding more base for advertisers to reach up.
Now, let me talk about a 40 area building sustainable value.
Which is all about driving business value for our partners and investing smartly annuity.
In our advertising business, our focus is on helping businesses find customers as they work to rebuild and recolor.
He gave search advertising the ability to add high quality images to their ads.
Helping shop us quickly see products to consider and take action faster.
We added features to make medio adds more easily shoppable and browse the below on Youtube a smaller businesses are shifting to online to offset physical store closures.
<unk> Smbs, we are proud that so many are taking advantage of new features including smart campaigns to reach new online audiences and promoted pins on Google maps to let customers know their businesses are open.
The mpower businesses to understand in an easy and visual way what products people are searching for doing the special circumstances that go with 19 has created the rising retail categories to surface. This fast growing product related categories.
As I mentioned earlier beyond advertising revenue, we see good traction in areas, such as you'd give subscriptions glue play and club.
You too premium music and TV subscriptions performed well during the quarter, we're seeing strong demand for these services.
Adding content regularly including many Viacom networks like a b T and comedy Central.
In Q2, Google play it happened game downloads, but up more than 35% year over year, which means that revenue for developers continue to grow.
Let me go but deeper on club.
In the first half of 2020 technology and innovation proved to be a significant recovery mechanism for businesses.
Those who are shifting to digital and embracing the spirit to innovate our evolving them growing.
Our commitment to bringing innovative products to market building and scaling our go to market documentation on string strengthening our partner in that book helped us continue to meet the growing need so for customers this quarter.
We see two distinct trends as businesses embraced the future work.
First the future of business would be more digital.
Customers are choosing Google cloud to either lower their cost by improving operating efficiency or to drive innovation through digital transformation.
Sounds like curate Dr Pepper, Deutsche Bank, those Telefonica, Orange and group or no.
And we are helping many government agencies deliver care for their citizens.
Including the states of Oklahoma in New York here in the U.S., and Italy, and Spain in Europe.
Second the future for would be more collaborative virtual collaboration is critical in order to adapt them succeed in the change in global landscape.
In Q2, we saw continued demand from customers using G suite to help their employees work from home, including the pro in India and expanded our relationship at the state of Arizona here in the with.
Our customers are using G suite tools across industries in new ways.
Whether it'd be financial advice is working with clients doctors and nurses toning to telemedicine.
Or teachers educating students with remote learning.
In Q2, we peaked at more than 600 million meet participants in a single week.
As one example, pwc employees reached nearly 10 million hours of video conferencing, and Google meat in a single month.
Make collaboration easier for everyone. We introduced an integrated workspace for GE mail chat meet in dry on mobile and desktop.
Our cloud product strategies differentiated and our investments in direct sales going endemic distribution are beginning today what is.
Before I move daughter beds I want to know that our hardware team continues to make good progress and I'm excited by the new upcoming devices, we have coming this fall.
And finally, no other but.
They more announced that Fiat's, Chrysler automobiles, who work would be most its strategic partner for El for autonomous technology processed food portfolio.
Let's say entered into a partnership agreement with the with Volvo car group to work together to integrate the venmo driver into an all new electric vehicle platform for ride hailing services.
Finally, they won't close to its externally led investment drown, bringing the total funding to $3.2 billion, which includes investment from alphabet.
And wings drone delivery service started delivering library books students in Virginia.
In closing an important in an uncertain time in the world. We had all grappling with the pandemic and is troubling economy, but also reckoning with centuries of injustice that affect our block communities everyday.
John Lewis is federal today provides a timely to minder struggled in.
In June we announced a significant package of commitments to help our black plus community internally at Google.
So that's the wider black community.
This included product experiences that mattered to black users, including the option for business owners to identify that business as black cone and Google maps and search.
We also announced 175 million dollar economic opportunity package to support Black business owners startup founders Jobseekers and developers. In addition to U 200 million dollar fun to amplify black creators in order.
They commit to contributing to long term meaningfully change, both externally and within Google and with that I'll now turn it over to the.
Thanks Sundar.
We are cautiously incur expire result for the second quarter, although mindful of the fragile global economic environment.
Our advertising revenues gradually improved through the quarter and our non advertising revenue line paying their strong performance.
Typically Google cloud and play.
I will begin with a review of the quarter on a consolidated basis for alphabet focusing on year over year changes.
We will then review results for Google followed by other back.
With our outlook silver and I will then take your questions.
Starting with consolidated alphabet result, our total revenues in the second quarter were 38.3 billion.
2% year on year flat in constant currency.
You are on here to clients in our advertising revenue from search and network were offset by growth in Google either on Google Cloud revenue.
Details of alphabets consolidated revenues by geographic region are available in our earnings press release.
Across each region, we saw a gradual improvement in revenue in the corner with some differences reflecting product.
In terms of that foreign exchange impact exchange rate movements resulted in approximately 2% headwind to reported revenue.
Regarding our key expense line on a consolidated basis total cost of revenues, including <unk> with 18.6 billion up 7% year on year.
Other cost of revenues on a consolidated basis was 11.9 billion up 18% year over year, primarily driven by Google related expenses.
The biggest factors here again, this quarter or costs associated with our data centers and other operations, including depreciation.
<unk> content acquisition cost.
Primarily driven by content costs for you to TV and our paid to music and premium subscription services.
All of by cost for you to advertising supported content.
Operating expenses or 13.4 billion up 7% year on year.
Headcount growth with the largest driver of here on your growth for both R&D and you know.
Secondarily the increase in Seattle reflects contributions mainly for covered response and reserves for estimate of credit losses of our customers.
The year on year decline in sales and marketing expenses was due to lower advertising and promotional spend as we pause or rescheduled campaigns on pivoted to digital format for flagship event.
All three categories benefited from lower T. any expenses.
Stock based compensation totaled 3.3 billion.
Head Count was up 4450 from the first quarter.
Again, the majority of new hires or engineers and product manager.
In terms of product areas, the most sizable headcount increases where again in Google cloud for both technical and sales rose.
Operating income was 6.4 billion down 30% year over year, and our operating margin in the quarter with 17%.
Other income and expense was 1.9 billion, which primarily reflects an unrealized increase in the market value of equity securities.
Provide more detail on the line items within aligning our earnings press release.
Our effective tax rate was 15.9% net income was $7 billion and earnings per diluted share or $10.13.
Turning now to Capex and operating cash flow cash capex for the quarter was 5.4 billion, which I will discuss in the Google segment results.
Operating cash flow with 14 billion with free cash flow of 8.6 billion.
We repurchased $6.9 billion up our shares.
We ended the quarter with cash and marketable security of approximately 121 billion.
Let me now turn to our segment financial results.
Starting with our Google segment.
Revenue for 38 billion down 2% year over year.
I'll now go through the individual advertising revenue line.
Starting with Google search and other advertising revenue, we generated 21.3 billion in revenues in the quarter down 10% year over year in the aggregate with improvement as the quarter progressed.
We saw a gradual return and user search activity to more commercial topics throughout the quarter.
Followed by an increase in spending by advertisers.
This resulted in an improvement year on year search revenue trends during the quarter with search revenue is essentially flat to last year by the end of June.
You too advertising revenues were 3.8 billion up 6% year on year, driven by ongoing substantial growth in direct response.
Offset by continued decline in brand advertising, which then moderated toward the end of the quarter.
Network advertising revenues were 4.7 billion down 10% year on year with trends improving somewhat toward the end of the quarter. That's advertiser spend began to return.
Turning to Google cloud, including TCP and G suite revenues were 3 billion for the second quarter up 43% year over here.
T C. P maintained a strong level of revenue growth it delivered in the first quarter and its revenue growth with again meaningfully above cloud overall.
TCP growth was again led by our infrastructure offerings, and our data and analytics platform.
Overall, the lower Google cloud revenue growth in the second quarter relative to the first quarter reflects the fact that C suite lap the price increase that was introduced in April last year.
He suite maintained healthy growth in average revenue per seat as well as in seat growth, which does not include customers, who took advantage of our free trials as they shifted their employees to work from home.
Other revenues were 5.1 billion up 26% year over year, primarily driven by growth in play and you to non advertising revenue.
Within clay App revenues in the second quarter benefited from the impact of very strong growth and the number of active buyers with more people at home looking for entertainment.
And then you tube subscription revenues, we continued to benefit from subscriber growth across its series offerings.
Total traffic acquisition costs were 6.7 billion or 22% of total advertising revenues down 8% year over year.
Total Tac as a percentage of total advertising revenues was up slightly year over here.
GAAP operating income was 7.6 billion down 26% versus last year and the operating margin was 20%.
Google accrued capex for the quarter was 4.8 billion, reflecting investments in servers data centers and office facility.
Moving onto the performance of other back for the second quarter revenues were 140 million, primarily generated by fiber and fairly the operating loss was 1.1 billion.
Let me add with our outlook as I said earlier ABS revenue gradually improved during the quarter across search you too and network.
However, we believe it is premature to gauge the durability of recent trends.
Even the obvious uncertainty of the global macro environment.
As we discussed on last quarters earnings call Global macroeconomic performance has tended to be correlated with AD spend and as a key signal to monitor.
Over the long term, we remain optimistic about the underlying strength of our business.
In terms of Google Cloud, we're pleased with the traction we're having with large customers, who are making multiyear commitments with us.
This is reflected in the strength of our backlog, which ended the quarter at 14.8 billion substantially all of which relates to Google Cloud. This performance is the result of the investments, we're making into the cloud go to market organization.
Google place Q2 results reflect growth and the number of new buyers with accelerated adoption as people stayed home.
Performance also reflects the significant investments we have made in the ecosystem to support developers and users.
Such a successful promotion and adoption of our partners absent games, and new locales around the world and expanding the availability of local forms of digital payments.
Moving on to profitability.
Decline in our search revenues put significant pressure on profitability, which was further impacted by our Gulf <unk> ongoing investments for long term growth.
As I discussed last quarter.
Much of our expense base, both in cost of revenues and Opex is not directly correlated with changes in revenue.
For example, although top and content acquisition costs are obviously tied to revenue.
There is a sizable percentage of items and other cost of revenues that are generally less variable in nature, such as depreciation and operations costs of our technical infrastructure as well as for activities like customer support and content review.
We remain focused on the user and customer experience.
Continue to invest to support our products.
With respect to operating expenses, although we still expect the pace of head count growth to decelerate somewhat in 2020, we're continuing to higher aggressively in priority areas like cloud, we still expect that head count additions will be seasonally higher in Q3, as we bring on new graduates.
Consistent with prior years, we expect sales and marketing expenses to be more heavily weighted to the back half of the year import impart to support product launches and the holiday season.
Turning to Capex, we continue to expect a modest decrease in the level of total capex and 2020 compared with last year.
This is particularly due to our decision to slow the pace at which we acquire office buildings in the near term if we focus on re imagining the optimal work environment.
This also reflects the slower pace of ground up construction for both our office facilities and data centers due to covert 19.
In terms of technical infrastructure as we discussed last quarter, we anticipate investment to remain at roughly the same level as in 2019 with relatively more spend on servers, then on data center construction and benefiting from our ongoing focus on server efficiency.
With respect to capital allocation or primary use of capital continues to be to support organic growth in our businesses followed by retaining flexibility for acquisitions and investments. We complement these growth drivers with a return of capital as we indicated in our press release today, Our board has authorized the repurchase of up to.
To an additional $20 billion.
Our class C stock, Thank you and Sundar and I will now take your questions.
Thank you as a reminder to ask a question you need to press Star then one on your telephone to withdraw your question. Please press the pound keep.
Chip event any background noise, we ask that you. Please meet your line. Once your question has been stated.
And our first question comes from line, Eric Sheridan from you B.S. Your line is now [laughter]. Thank you, particularly question maybe two if I can person doing one on the commercial initiatives a lot of announcements from the company in the quarter moving towards sort of can you shouldn't free and the uplift during both the albatross E commerce.
One of understand some of the moves you're making strategically and do you think dispositions you broadly against obviously in E. Commerce Lynch keep the cheating a lot of pulled forward penetration given the current environment and chicken on you too you know, obviously, a fairly volatile brand advertising environment in TV advertising will need some flux what are the opportunities both in the U.S.
Globally to go after sort of TV AD budgets under the you tube umbrella. Thanks, so much.
On on.
On shopping.
No I spoke a little bit in my remarks, but really excited at the put into their you know team as Phoenix or getting a very well.
Overall, you know you this.
Come to Google a lot to find the products they're looking for.
But we see an opportunity to enlist and make the experience better.
The times the journeys me failed because they don't find what they're looking for so we want to make sure. It's comprehensive next when people find what they likely want to make it simple for them to transact and so working on that into an experience has been big focus and obviously, making shuffle merchants or you know a really.
Sure. We are open to business for merchants, and we are getting value to them as being as being the focus.
The only early indications are that users are responding.
Positively a you know both in terms of user engagement.
And more importantly, you know giving value by emergence of fluid investment there. So if somebody is considered done door first principles, we want to ensure that Google is the best place for you know merchants dependent but users and so I'm excited by it and he will continue to see his focus in this area.
The second was on you tube brand or you know, obviously, you too, but it's been doing well in terms of engagement and watch time.
And so we see a long term opportunity there we've added strength on direct response this fall through this quarter.
But on brand, which was your question you know we are obviously investing not just in your two main product you to previous walls and so you know adiosbarbie can offer up a bundle advertisers are interested in streaming.
Bringing the bundled together, especially dices enough friends through Youtube select.
You know is a big opportunity as well so we are focused on us.
Thank you.
Thank you and your next question comes from Doug in Miss from JP Morgan. Your line is now open.
Thanks for taking the question I'm I've two Oh, just first Ruth curious if you can just talk about the cost structure, a little bit more we know you will continue to invest to drive growth over the long term I'm just curious how you're thinking about does the topline he starts to recover more hopefully over coming quarters, and then secondly, I know.
He said that a search trends were flat to last year by the end of June I'm. Just curious if there's anything you could add drums or what you see more recently over the last month as well thanks.
I think telestack so in terms of.
Cost structure as as we talked about last quarter, we haven't focused on taking steps to enhance efficiency in the near term.
And that being said, it's it's center and I, both net of what you're saying, it's the fact that we do remain focused on investing for the long term sort of breaking that down in cost of revenues, while pack and content acquisition costs are obviously tied to revenues I'm. There is a sizable percentage of other cots revenues that are not directly correlated with.
Revenue growth as I noted a in opening comments and and we are very focused on these are experiencing the overall ecosystem. So we are investing to make sure that were supporting our products are they remain reliable and all environments and then in Opex.
Much of our operating expense is generally less variable and not necessarily correlating to revenues in the near term. So in terms a couple of the items you know, although we do continue to expect the or in your head count growth rate to decelerate.
As I noted we are hiring aggressively in priority areas like cloud and so yeah, we're taking.
Near term step to enhance efficiency Ah, but still investing for the long term. So you know we're trying to make sure that we're hitting those those trade off those trade offs right and as I noted, we do expect the here on your head count growth rate in 2020 to be down somewhat from the 20% year on year.
Great last year, and that's even adjusting for two items that put upward pressure on head count growth you know that first we're moving certain customer support roles from third party vendors to Googles in House Operation Center that is actually at Opex neutral, but does increase reported spend and then second depending acquisition if that that so we're trying to.
Navigate it appropriately in terms of your second question in terms of.
Ah search trends and what we saw throughout the quarter I'd say that following a rough and to the first quarter adds revenue gradually improved in the quarter not only in search, but you tube and network and so for search we ended March it up mid teens percentage decline in years.
On your revenues and then as we progressed through the second quarter, we saw a gradual return and use our search activity to more commercial topics and that was followed by an increase in spending by advertisers. So this that resulted in a gradual improvement in here on your search revenue trends in the second quarter. We ended basically flat to last year by the end.
Yeah.
And.
You know to carry it for it out but we're pleased that adds revenue gradually improved throughout the quarter as I said, we do believe it's premature to say that were out of the lids given the threat to lay trip the macro environment and as you're aware AD spend does tend to be correlated with macroeconomic performance and so the macro backdrop.
Couple of continued to be a key signal to monitor but to your question based on our estimates from the end of June through last quarter. There has been a modest improvement in July.
Great. Thank you for the callers thank you.
Thank you and your next question comes from Heather Bellini from Goldman Sachs. Your line is helping.
Thank you so much I just wanted to ask a question on a two questions related to Google cloud if I could one sundar I was wondering if you could share with us how you seem to change and pace of customers migrating workloads to the cloud given coated and I'm also wondering if you could share with us kind of the puts and takes and Microsoft talked about this.
Little bit last week with their as your business, but for those that have to celebrate it workload migration to the cloud how much has that offset the impact it industries or companies that you might be sure surveying, where they're seeing lower utilization than what they normally do of cloud capacity see if you can kinda talk about the puts and takes to the growth as well that be gray.
Thank you.
Oh, thanks to their Oh, we're all you know.
From my vantage points.
You know, obviously with Google cloud, we've been investing to scale up, especially on the People's side on engineering and go to market and then obviously on a investment side, we did us into the cloud regions.
And so on and support me, it's been good to see I see a scaling up the are executing more effectively.
I've been personally more than many many conversations last quarter, we had.
Many large customers I'm on the cloud a big telco deals and banking Bill Deutsche Bank. As an example, so overall I feel the momentum with strong generally focused like Ah things, where a company well through the course, Oh, you know post.
For a secular interest in our digital transformation companies, a deeply thinking long term and planning for us. So overall I felt.
At the moment there.
And I told our execution I asked me are scaling up obviously they are scaling up a lot them. So it's you know the combination is working well.
Your second question in terms of puts and takes you know overall I think there are.
You know I will I wouldn't.
I don't know, whether there's anything significant <unk> mi highlighting you know obviously you are right to point out that it doesn't affect everyone. The same but you know nothing significant for me to highlight here today.
Thank you [laughter].
Thank you and your next question comes from Brian Nowak from Morgan Stanley. Your line is nothing.
Thanks for taking my questions I've I've to the first one sundar yeah. We we try to always figure out you know changes in consumer behavior I guess.
As you have sort of been studying what people have been doing through shelter in place in from the way things are changing from a consumer perspective talk to us about areas Youre most focused on investing in and driving your teams to create new products to really help consumers with their their changing habits.
Then the second one Ruth you know I know there should we look ahead with potentially a larger percentage of the workforce work remote or work from home you know without looking for quantification, maybe just talk to us about some puts and takes areas, where do you could see either efficiency or higher potential cost from a a larger percentage the workforce being remote over the long term. Thanks.
You know.
First one you know when there is.
The shift to online is profound you know, we see people engaging and engaging a lot of doing you were things time, they did before people's interest.
Our broad owning I would say oh across the board and and so for example, you know we are looking for me I'm looking at different types of use a journeys and making sure that each of them is getting deeper and better.
Sample in Google as people have started coming for more health related information how is that experience working thinking about that for the long term and investing in it I always he spoke about shopping earlier and that's been a.
Big focus for Us our education in general and.
And then we think through small medium businesses and a bigger companies you know thinking through collaboration veggie suites potential lists.
The investments we had a we're undertaking all that is very exciting to me.
But I would say cutting underneath all Dod Ah you know maybe why we didn't talk about it you know really focused on our AI teams doing they miss means they need a you know evolving our next generation TP use and the teams building better Tomatoes, and but I was out of them all that a you know I think our ability.
<unk> ability to do more things a you know is something I'm really interested in focused on a small so that's something I'm excited about us along with them.
And then in terms of your question about work from home I, you know I think it's a it's a great point, because obviously seat so much into a lot of the product work that we're doing and cloud through <unk> et cetera. So at that that's where I would actually start but I. Appreciate what you're asking is how are we looking at our own coffee.
And we called that out last quarter in particular with respect to Capex and you can sort of see it here this quarter. The the name change and Capex has really been we slowed the pace on the office facilities front and what we're looking at is really how to reimagine what the workplace.
Well look like we continued to be very much focused on the fact that place and space are important we believe in collaboration Serendipity is key to innovation. So we do view space and office as important and are very focused on what does that mean over the the long term, we've actually opened quite a number of our offices and in fact in 40 countries and do.
Hope to reopen in many more but your question to what does it mean for overall cost structure, where we're looking at that and we took place you see it now is in our Capex and the way we've been looking at it and our indication that we do expect 2020 will be lower capex on the facility side. That's a result.
Great. Thank you both.
Thank you and your next question comes from Brent <unk> from Jefferies. Your line is now open.
Thank you I was just curious if you could just comment in terms of some of the near term business trends and anything that's changed as you've gone through the month of July versus what you saw in June.
I'm sure I I already commented on that with respect to to search you know it but to broaden it a bit more and again. This is based on estimates from the end of June through last week. So for you too we ended March with a year on year growth rate.
The high single digits, and that's reflecting us a substantial headwind from brand I'm the headwind from brand moderated modestly at the end of the second quarter and then when we saw further improvement in July.
Direct response has been consistently strong.
From that were revenues improved toward the end of the second quarter and we have seen a further slight improvement in July.
Obviously three weeks, it's not a quarter, but that that's you know based on the estimates here from the end of June and sender and I've always said you know when you look at for example, cloud. It has maintained you know its strength.
Consistently and I, you know I'd say that that that with the business. It's growing at this pace its really much more about a secular trend to the move to cloud so really nothing to comment on there.
Thanks for the color.
Thank you and your next question comes from Justin Post from Bank of America. Your line is smelting.
Great Sundar I don't know how much you can comment on the regulatory environment, but it's obviously top of mind that the hearings yesterday.
Maybe just characterize it for forgive me right now and are you seeing any progress with the regulatory environment and then and then secondly, you know we saw the you tube TV price increase.
Pretty interesting business model, but you no longer term do you see that as really should she just important for them to do you to brand or do you think you can have really profitable business on that thank you.
You know on the on the regulatory front are you know weve obviously been.
Operating under scrutiny for Awhile and you know we realized.
Our scale or you know that's appropriate and you know we've engaged a you know constructively across jurisdictions and.
You know from my standpoint.
You know OWS.
Confident in the approach, we take a or focus on uses and in every feet on the evidence and almost all the U.S., we operate and me expand choice or <unk> or a lower prices and it's a you know oral does a very fast paced with innovation, so it's dynamic and comp, but it does having said that you know.
Lastly, you know we will.
All paid based on the roof and so to the extent that are any yesterday, we need to adopt a we will and as a company I think we will be I think being flexible. It on those things is important I think I think the scrutiny is going to be.
Here for a while in and so we're committed to working through it.
On on the second question around Youtube Youtube TV yeah.
There is a you know me it's a good question I spoke earlier about even from a Brendan how people think about or they are interested in streaming.
So I ask you to PV gets more scale I think I think we will see more opportunities there be it obviously still into early stages of building out the product and.
And just you know recently, we've added a bunch of new channels, and and ER and you don't making sure it's working well.
In the U.S. you know the TV market is a big part of the advertising market too. So overall you know if he can invest here in scale up I think the synergies you to become more meaningful overtime and so a you know well you know so excited detection the product is getting but still too early.
Thank you.
Thank you and your next question comes from Kevin repeat from Evercore. Your line is now open.
Hi, Thanks for taking my question. This one's for Sundar I was hoping you might be able to expand on the earlier comment you made about the.
Strategy, particularly wondering if there's been things over the past five month <unk>. We've done that you thought you know I'm expansion of your strategy, you're not lose group strategy might be able to solve for or was that relates to sort of commercialization or for monetization or anything across the business just really do occur.
Thank you.
You know area, but which you know the suppose you know across the board you know the progress the steep so I'm very happy with the pace at which our R&D on AI is progressing.
And you know for me, it's important that to be a state of the ARCUS The company, a and B, a leading and and you know to me Im excited at the pace at which or engineering and R&D teams are working.
Both because Google and and deep buying somebody excited about it.
Specifically, we are making good progress in areas like language understanding and Ah you know you saw some improvements last year significant improvements that burden surge, but you know both took us a few years to get there, but things like that I see more stuff into future and so excited by it and the idea that I think.
Just to understand vis-a-vis potential this definitely cloud you know we see the potential there.
And I think it's been related to his question too I think companies are thinking about <unk> migrating workloads and so on but the longer on opportunity of actually using AI to truly have business solutions for you for whatever industry. You are in that feels like there's a lot of potential envious two very already there and so part of it is.
For us connecting the dots internally and bringing it up solutions to our users. We have done. It then soda in part to yes, but I I see this a bigger opportunity in the future.
Thank you.
Thank you and your next question comes from Ross Sandler from Barclays. Your line is now open.
Good I said two questions first on you tube subscription. So can you talk about the size of that area of the business relative to that 15 billion.
We had only about 15% of total you to revenue and then how he will be faster growth in that area relative to advertising impacting.
You know your long term profitability goals that you too.
And then the second question is on a search so it sounds like you know the flat.
Hi, Good run rate you on your is pretty encouraging if we took on travel I'm guessing, it's it's well above that so how would you characterize the query growth versus just the at auction dynamics outside of travel across two other categories, where we back to a pre covert levels.
Those areas. Thank you.
So in terms of or the first question, we haven't broken out the specifics within the you tube subscription revenues you to you tube subscriptions are in other rather thing is it's not an advertising revenues.
And overall as we think about.
The opportunity our view is and we talked about this only relaunching the subscription product it was really.
Responsive to what we're hearing from from users and.
As we look at it music is a key part of the overall you tube experience. It's an important component of watch time and what we found is that users wanted a and they want it twice since I wanted it premium you tube experience with AD free viewing and the ability to download songs and videos and and that was really the.
That's in addition, you to premium provides additional revenue streams for music labels and publishers. So for example in 2019, you to paint the music industry over $3 billion.
And what we've done is meaningfully ramp our geographic presence from five contained in the beginning of 2018 to 94 countries today and you know early this year, we announced that you to premium at more than 20 million paid subscribers up more than 60% for says the the prior year.
So our.
Subscriber numbers have continued to grow there and it really was driven by the goal ticket users choice.
Thank you and your next question comes from Colin Sebastian from Baird. Your line is now open.
Oh, Thanks, very much I guess, maybe a follow up to the earlier question on E commerce beyond the marketplace functionality and some of the free or promotional transactions I wonder how some of the other initiatives are going to play a role and things I'm thinking specifically or.
Were you focused before on Google checkout, and maps and some of the assistant functionality, how those me play a changing role in commerce I'm on the Google platform. Thank you.
Great question, you know I think the bar is Ah you know to have that you know super simple XP and such as delightful and that the of peace of mind them satisfaction in terms of getting the product and being able to the Turner them. So on for the into in a fun other matters a lot then.
<unk> part of.
The reason light through the chain just couple of things. We have done you know as he saw we you know we change and you know either mode. The commission for merchants to a b b on the platform and and part of it as a you know by Demoing bad or you know they can take that and invest and be chipping be Delaware a beat the customer.
Our experience and so that that matters.
Matters I think the overall experience and from our standpoint, the buy on Google or experience is something which deeply investing in you know obviously, our integrations with pay Pal you know our investments.
Underlying it to make sure for.
You know a lot of fuses that it's as close to a one click experience as possible. It is a big part of the investment as well.
Thank you.
Thank you and your final question comes online Mark meat from RBC. Your line is now one thing.
Okay. Thanks, I want to ask a broad question about Google.
Place or position or whatever in online retail and I asked this because.
Goose also obviously been central search has been central but also you to spin central to Commerce online commerce for the last 20 years, we've gone through this pandemic, where there's a real inflection point she didn't Amazon's results, we see it and Shopifys results and I'm not sure. She then Googles result, so just talk about how you think you'll broadly Google.
This position for that for what's really been like a two or three year pay for it and accelerated ramp up of online retail demand and I know you position. The way you want to be position now are the things you need to make to the changes need to make the product and services to be better positioned thanks a lot.
You know, obviously I think as a company our our strength comes from a diverse categories in which VSOE uses right then and you know, it's not just products and services its white areas, including areas like travels so so its diversified and.
But it also means to attend to make that idea of strength, but that are idiots of it if they you get impacted us well. So I think that's what it's reflected.
In what you see on E Commerce, you're right there at the ecommerce providers are seeing a big inflection point, but in a dollar essential categories like grocery some stuff, which are both in which we don't directly playing but to us. The reason we are doing this long term focused effort on shopping a with the new.
Leadership team is to precisely make sure <unk> as a platform.
We are improving and asked that as I asked the shift continues you know glu continues to be a important placed by which people come and participate in those journey. So long run I see a growth opportunity with related to what you're investing in in that as well not just through search, but a search in the shopping investments we.
Making but and you tube a you tube and also helping retailers on the cloud side, it's an area, where there's naturally it naturally a lot of interest.
To to work to partner with Google until we see that as a big opportunity as well.
Thank you Sir.
Thank you and that concludes your question answer session for today I'd like to turn the conference back over to Jim freelance for any closing remarks.
Thanks, everyone for joining us today, we know you all have a busy evening, we look forward to speaking with you again on our third quarter 2020 call. Thank you and have a good evening.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
[noise].