Q3 2021 Alphabet Inc Earnings Call
Welcome everyone and thank you for standing by for the alphabet Q3 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any.
Further assistance. Please press star Zero I'd now like to hand, the conference over to your Speaker today, Jim Friedland Director of Investor Relations. Please go ahead.
Thank you good afternoon, everyone and welcome to alphabets third quarter 2021 earnings Conference call.
With us today are Sundar, Pichai, Philipp Schindler and Ruth 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 COVID-19 pandemic on those areas may be considered forward looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially.
For more information please refer to the risk factors discussed in our most recent forms 10-K, and 10-Q filed with the SEC.
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 call over to Sundar.
Thank you Jim and good afternoon, everyone.
In 2016, I laid out our vision to become an AI first company.
Five years later this quarter sort of so to show how our investments in AI are building more healthful products for people and for our partners and local communities.
Today I'll begin with new product highlights then I'll cover our cloud business followed by Youtube.
First product highlights.
Search remains the heart of what we do we've made remarkable advances over the past 23 years that benefits search and related products like Google assistant with just celebrated five years.
Earlier this year, we announced that we reached a significant milestone that multitask unified model or mom for shock.
Mum has a thousand times more powerful than Burt and kind of understand information across many context like text and images.
At our search on event in September we shared how we are using Monte improve Google lens. So people can search using both images and words.
We also shared that we are bringing a more visual shopping experience to search part by the Google shopping graph it linked shop us with over 24 billion product listings from merchants across Tibet.
Google maps now offers eco friendly routing.
It lets drivers in the U S to some more fuel efficient drought saving money and reducing emissions.
Maps now has a wildfire layer so that people can get up to date details to make quick informed decisions during emergencies.
Finally in search and discover feed we are continuing to support the news ecosystem and make quality journalism more accessible.
We will give a bit more detail about our new showcase partnerships.
Okay.
Turning next to hardware I Hope you saw our fall pixel event last week I'm very excited about the range of pixel phones available this holiday season.
The new pixel six since Expro bring together the best of Google AI software and hardware at the most advanced and inclusive camera recipe waiver boat.
They are beautiful fast and powered by Google tensor, our first ever system on a chip.
It's specifically built to support Google AI and machine learning on device.
And provides a long term foundation for our pixel devices.
We also introduced our new necessary in your program, which uses nest thermostats to support clean energy use in the home.
Onto Android Android 12 is getting great reviews. Its the biggest design change in Android history with new visits to personalize. Your phone. We also introduced accessibility features that use gestures to control their phone and communicate.
Android 12, a secure by default and private by design.
New dashboards and the indicators make it easier to view and not just privacy permissions.
And disable access to device sensors and location information.
We've also made progress with the made for India affordable smartphone co develop with reliance.
The Geophone next device features premium localized capabilities and is on track to launch in market by Diwali.
Onto cloud, where we see continued momentum with Q3 revenue growing 45% year over ear with G. C piece revenue growth rate about cloud overall.
At cloud next two weeks ago, we unveiled hundreds of new capabilities services and solutions we.
We also announced 20, new and expanded partnerships to support the growth and scale of our customers around the world.
More than any of the top cloud provider, Google cloud has unique capabilities to meet the needs of enterprises digital natives and F. N b surround the world I'll highlight three.
First our leadership and real time data and analytics and AI is vending customers like Carrefour, Belgium, Deutsche Post DHL, and Wendy's, who are unlocking data to deliver unique business outcomes.
Bakery, our leading data warehouse solution is reducing cost and driving productivity at Cardinal health and ATB financial.
Our differentiated AI and ml based industry solutions are helping leading global companies.
G appliances are higher company is integrating vision AI into their next generation smart home appliances.
And Ikea retail is using recommendations AI to drive a 30% increase in customer click through rates.
Second customers see value in our open scalable infrastructure that enables them to run workloads anywhere.
Our cloud at the edge or in their data centers.
Rhode Island field scale, let's say say P environment, Siemens synergies migrating its global network of data centers and companywide S. A P systems and Indonesia largest technology digital Native go to group is supporting over 100 million.
Monthly active users with Google cloud.
General Mills Bell, Canada, and Wells Fargo are harnessing our leadership in multi cloud and our open development environment.
And to meet the unique digital sovereignty needs of customers around the world, We announced industry first partnerships with T systems in Germany and palace in France.
Third as consumers businesses and schools continue their shift towards hybrid work the threats of cyber security continue to increase.
Customers are turning to Google workspace, and our cyber security platform to provide the ease of use collaboration and security they need.
These include organizations like discovery.
Common spirit health and the state of Maryland, who want to foster creativity, while securely protecting their users.
We are also seeing strong growth in our broad portfolio of cyber security products.
This includes chronicle, one of our zero trust offerings with Jetblue uses to detect cyber security threats, helping to protect its customers and enterprise.
We are bringing our teams deep expertise to customers through the Google Cyber security action team.
And the new work safer program, which provides best in class security for E mails meetings messaging and more.
Earlier, I mentioned, a few of the sustainability related product features we announced our cloud customers already benefit from operating on the world's cleanest cloud and last year, we set an ambitious goal to run our data centers in campuses.
On 24, seven carbon free energy by 2030.
Two thirds of the electricity consumed by Google data centers in 2020 was matched with local carbon free sources on an hourly basis.
And our new carbon footprint too gives customers carbon emissions insights.
Associated with the Google cloud platform usage.
Now over to Youtube for a few highlights we recently surpassed 50 million music and premium subscribers, including those in trial and Youtube shots continues to see high adoption rates in the past year. The average number of daily first time creators more than doubled.
Next week as global leaders gather in Glasgow to address climate change Youtube is partnering with cop 26, the livestream conference activities, making they even more accessible for everyone.
As we grow we are maintaining our open global platform responsibly by removing harmful content and reducing borderline content.
With our AI investments and the promotion of trusted sources.
Hello, there significantly lower the Violator view right, which is the percentage of views on Youtube from content that violates our policies.
Onto our other bets Raimo began welcoming writers to its trusted tester program in San Francisco. In addition to its fully autonomous ride hailing service currently in Phoenix next.
Next year, they more will open a dedicated trucking hub in the Dallas Fort worth area, helping support commercial freight routes across the southwest.
And we announced last week the first commercial expansion of things on demand are delivery service to Walgreens customers in select locations.
To close the world is slowly starting to travel and meet up in person.
And this quarter I joined events virtually to celebrate some big milestones in regions around the world.
Earlier this month, we announced a $1 billion investment in Africa over five years to support the continents digital transformation.
And September Mark 20 years since we opened our first office outside of the U S in Tokyo.
We now have thousands of employees in 28 offices across the Asia Pacific region, and we are investing in cloud regions and digital skills programs to help expand economic opportunity there.
As you can see our business in APAC is growing really well.
In Africa Asia Pacific and beyond it's been a successful quarter and we have lots more innovation and product development on the way.
Thanks to our employees around the world for their contributions as we continue our motor hybrid work I hope to see more of you in person soon thank you and over to Philip.
Thanks, Sundar and hi, everyone, it's great to be with you all today.
We're pleased with the growth in Google services revenues in the third quarter.
Year on year performance was driven by broad based strength in advertiser spend consumer online activity also remained elevated.
In the third quarter retail was again by far the largest contributor to year on year growth of our ads business media and entertainment Finance and travel were also strong contributors.
Let's take a deeper look at some of the trends that drove this quarters performance.
First from a big picture of global recovery perspective, we continue to see a lot of unevenness, some economies have restarted and reaccelerate it, albeit at different speeds other countries, depending on local regulations and vaccines have been slower to rebound it.
It's clear that uncertainty is the new normal the world is in flux. So when it comes to anticipating change predicting demand and investing in innovation businesses need as much support now as they did a year and a half ago and we continue to help like in travel where hotel free booking links are increasing traffic for many partners from O.
T as to boutique hotels.
Like more choice travel partners like free exposure and advertisers like to augment pit campaigns with free listings. So last month, we launched free booking things for things to do in a new AD format that makes it easier to promote local experiences.
Now when you start zip lining aquarium or the Tokyo tower, you can buy tickets directly on Google.
And then there are companies like Alaska Airlines that are harnessing first party data and automation across search to navigate market fluidity and better understand the lifetime value of their customers.
They've increased return on AD spend by 30% plus versus the same period pre COVID-19.
Beyond travel business of all clients are increasingly adopting tools like AI, driven automation and insights to connect with customers no matter what stage of the recovery there in <unk>.
150 year old luxury retailer D being course turned to local insights and automation to speed up cross border expansion beyond the Netherlands, and Belgium, Germany, France, and Australia with a multi pronged approach, including shopping campaigns to being cough drove substantial growth throughout the pandemic returning visitors to online stores were up.
Four fold in first half 2021 versus 'twenty 'twenty.
Which leads me to retail we had another stellar quarter.
We've seen explosive growth in digital over the last 27 months, but as the world begins to reopen shoppers are returning to stores brick and mortar isn't dead. Instead omnichannel is in full force.
Searches for opening no near me up four times globally versus last year strong growth in local shop inquiries means people are researching their visits to stores more often before they go.
As a result, we've seen more advertisers include in store sales alongside e-commerce goals to drive omni channel growth.
Adoption has nearly doubled over the past year.
Take coats and optimized media spend into trending categories and launched curbside pickup just two weeks after its 1100 stores shut down.
After testing local inventory ads in Q4 Colts went all in on Omnichannel bidding across its paid search portfolio and is leaning heavily into a full funnel approach on Youtube, including CTV.
Core net sales were up 31% year over year in Q2 led by higher foot traffic and continued strength in digital.
Innovating in Omnichannel and Nextgen user experience. This remains core to our shopping strategy a few of our latest launches include.
Easier ways for business to show the local services they offer from hair extensions to auto repair across search and maps local inventory ads that highlights which products are in stock and went to pick them up.
Free shipping and easy return on rotation across search and shopping.
Our capabilities that bring in store moments online and that use us try before they buy and then instantly sharper images with Google lens.
Plus a new visual browsable experience on search there is a lot more to come including tapping into commerce on Youtube.
From shopper lifestream experiments with retailers like Sephora target and Walmart to pilots that viewers by directly from their favorite creators videos were still in the early innings of what's possible.
Our direct response momentum remains strong video action campaigns are driving more conversions than previous formats and by adding product feeds through these campaigns advertisers are achieving on average over 60% more conversions at a lower cost than those without.
Our brand business also performing well as I said last quarter Youtube to reach its becoming increasingly incremental to T. V were helping advertisers find audiences they cant find anywhere else.
Connected TV is driving part of this growth is our fastest growing screen the precision of digital paired with the scale of linear is proving to be an awesome combo and even more so now with the expansion of video action campaigns for CTV.
Advertisers can now drive conversions on the big screen.
Which brings me to help brands of all sizes continue to buy Youtube at both ends of the funnel to create future demand, while they convert existing demand and they're seeing upside for example, we found that advertisers using both Dr and brand video C brand driving 28% of conversion assists Domino's Pizza is a great example, there.
UK business delivered a <unk> return on AD spend on their direct response campaigns when paired with our brand campaigns.
Lastly, I've said, it before and I'll say it again, our success is only possible because of our customers and partners.
We do well only when they do well and it's a result of the revenue share models, we've talked about many times before three highlights first and Sundar mentioned, our commitment to high quality journalism and open access to information remains steadfast.
It's been one year since we launched news showcase in Q3 alone we signed over 120 deals and launched in three new markets, Japan, Columbia in Austria, and after more than 1000 publications across a dozen plus countries that we now have on board, 90% are considered local regional or community newspapers.
Second over 2 million creators are now making money in building their businesses on Youtube Youtube partner program with 10 different ways to monetize their content from Super chat to brand connect.
The next generation of businesses and media companies are being built by creators on Youtube and we're excited to help them grow.
Third I Echo Sundar excitement on pixel and to bring it to life and to use US we worked with an entire ecosystem of partners. We signed partnership agreements with over 45 carriers and retailers across nine countries at launch, including deep collaboration with each of the major U S carriers, AT&T T mobile and Verizon.
On behalf of many I want to say how grateful we are to collaborate with so many amazing customers and partners everyday we can wait to start doing more of this in person again soon.
So a huge thank you to our sales partnerships product and support teams for their work and dedication. The impact you. All continue to have is as we say in German wound Navarre.
With that roof over to you.
Thank you Philip.
Our revenue performance in the third quarter reflects continued broad based strength in advertisers spent an elevated consumer online activity as well as a strong contribution from Google Cloud My comments will be on year over year comparisons for the third quarter unless I state otherwise it will start with the results at the alphabet level followed by <unk>.
Segment results and conclude with our outlook.
For the third quarter, our consolidated revenues were $65 1 billion up 41% or up 39% in constant currency.
Our total cost of revenues was $27 6 billion up 31%, primarily driven by growth in Tac, which was $11 5 billion up 41%.
Other cost of revenues were $16 1 billion up 24%, reflecting in part the benefit from the change in useful lives made earlier this year the largest driver of the growth in other cost of revenues was content acquisition costs.
Operating expenses were $16 5 billion up 19% in terms of the three component parts of Opex first the increase in R&D expenses was driven primarily by head count growth.
Second the growth in sales and marketing expenses was driven by head count growth followed by the continued ramp up of spending on ads and promo in contrast to the pull back in the third quarter last year.
Finally, the increase in G&A reflects the impact of charges relating to legal matters, followed by head count growth.
Operating income was 21 billion up 88% and our operating margin was 32%.
Other income and expense was 2 billion, which primarily reflects unrealized gains in the value of investments and equity Securities. Net income was 18.9 billion. We continued to generate strong free cash flow of $18 7 billion in the quarter and $65 7 billion for the trailing 12 months.
We ended the third quarter with 142 billion in cash and marketable securities.
Let me now turn to our segment financial results.
Starting with our Google services segment.
Total go Google services revenues were $59 9 billion up 41%.
Physical search and other advertising revenues of 37.9 billion in the quarter were up 44% with broad based strength across our business led again by strong growth in retail.
Youtube advertising revenues of 7.2 billion were up 43% due to strength in both direct response and brand advertising.
The deceleration in the growth rate versus the second quarter was driven by lapping a strong recovery in brand in the third quarter of last year.
Network advertising revenues of 8 billion or up 40%. Other revenues were $6 8 billion up 23% driven by growth in Youtube non advertising revenues and hardware, which benefited from the addition of Fitbit revenues.
Google Services operating income was 24 billion up 66% in the operating margin was 40%.
Turning to the Google Cloud segment revenues were 5 billion for the third quarter up 45% T. C. PS revenue growth was again above cloud overall, reflecting significant growth in both infrastructure and platform services.
Strong revenue growth in Google Workspace was driven by robust growth in both seats and average revenue per seat Google cloud had an operating loss of $644 million.
As to our other bets in the third quarter revenues were 182 million the operating loss was $1 3 billion.
Let me close with some comments on our outlook with respect to foreign exchange impact on our reported revenues based on current spot rates, we expect virtually no impact in Q4 in contrast to at 1.5% tailwind in Q3 and 4% in Q2 in terms of outlook by segment for Google Service.
Says as I noted the strength of our revenues in Q3 reflected both underlying strength and advertiser in user activity as well as the impact from lapping weaker performance in the comparable period last year.
Given the gradual recovery in our results through the back half of 'twenty 'twenty the benefit from lapping prior year performance diminished in Q3 versus Q2 and will diminish further in Q4.
Within other revenues in the fourth quarter, we expect the ongoing drivers of revenue growth to be hardware does it do to the benefit from the holiday selling season, and inclusion of Fitbit as well as Youtube subscriptions, Google play's contribution to revenue growth will remain more muted given the ongoing impact of both.
Lapping the increase level of user engagement that started in the first quarter of 2020 due to the pandemic as well as the sea change that took effect on July one.
Within Google services, we expect sales and marketing expenses to be elevated in the fourth quarter to support the holiday season.
Turning to Google Cloud, we remain focused on revenue growth and are pleased with the trends we are seeing.
G C. P R customer wins as Sundar noted reflect our multi year investments in products and solutions that are purpose built to solve the biggest opportunities within our targeted eight industries.
Benefit of these solutions to our customers is clear and they are choosing to work with us as their long term transformation partner.
With respect to work space, we are pleased with the ongoing momentum in both seat growth and average revenue per seat, which underscores the value of collaborative solutions in particular as people increasingly are embracing our hybrid work model.
Our cross cloud, we continue to invest aggressively both in growing our go to market and product teams as well as building out our cloud regions.
At the alphabet level head count grew by nearly 6000 in the third quarter, including our seasonal campus hires and we expect robust head count growth in Q4 for both Google services and Google Cloud.
Turning to Capex the results in the third quarter, primarily reflect ongoing investment in our technical infrastructure, most notably in servers to support ongoing growth in Google services and Google Cloud. We also continued to increase the pace of investment and fit outs and ground up construction of office facilities to occur.
<unk> are ongoing head count growth globally, we will continue to pursue real estate acquisition opportunities, where it makes sense as you saw in our New York City announcement in Q3.
Thank you and now Sundar, Philip and I will take your questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to it.
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And our first question comes from Eric Sheridan from Goldman Sachs. Your line is now open.
Thank you very much for taking the questions maybe first one for Sundar, a big picture coming back to how you started the call. When you look out over the next three to five years, what do you see as some of the big investments that Google needs to make tomorrow your ambitions on AI and machine learning against aligning google's broader product and services against the rising digitalization.
The global economy would love to have that as a framing over the next three to five years and then maybe I'm not sure if it's directed better at Philip or.
Ruth but on a shorter duration basis, it seemed to be an element of headwinds and tailwind in the broader macro economy can you talk a little bit about the business elements of google's products and what elements of reopening dynamic youre seeing on a sector basis versus potential headwinds as we move into Q4 and next year from things like supply chain shortages or labor shortages or.
Things like that thanks, so much in advance for the color.
Eric Great question me, you're right in the fact that our AI and ml itself as to a broader a deeper.
Deeper investments, we are driving a and b are using it to across our product portfolio.
You know the recent launch of our tensor in pixel six is a great example of that so for example, we are willing to go as deep in the stack as needed silicon both on the cloud side with our tensor processing units and Google.
Google tensor on the client side is an example of that so overall thinking to compute networking are building data centers, making sure they are clean and carbon free.
And and really investing in the advanced models and algorithms on top which is a lot of it just done by our AI research teams.
So making sure we are able to attract the best talent across the world is all part of that so but do you continue to see us take undertake a deep technology investments and beyond that horizon. That's why we are thinking even about areas like quantum computing and so on.
So to the second part of your question, we continue to watch countries as vaccination rates climb and local regulations ease.
We expect some amount of heterogeneity in recovery, depending obviously on location and vaccination rates, but because every region is different it's hard to make a generalization from the data right now that said the consumer shift to digital is real and will continue even as we start seeing people return to stores.
Shopping habits have ebbed and flowed over the last 20 months, but the underlying takeaway is that people want more choice. They want more information more flexibility and we don't see this reversing.
Omnichannel I talked about it it is definitely in full force I said. This earlier, we've been really focused on building features and solutions to help retailers large and small succeed here and we think this will continue as the world reopens and shoppers fluctuate between online and in store based on whatever it's really more convenient.
Youtube is exciting for many reasons, it's incredible to see the amount of content that's valuable for people across so many topics and we're helping advertisers tap into this end.
And whether it's browsing for inspiration product research or actually making the purchase of the 1 billion shopping separate sessions happen across Google every day, and they're happening on search and Youtube and image search and shopping tab and lens and so on so.
So frankly, we're really encouraged by the long term opportunity in commerce, and we are laser focused on helping business of all sizes connect with their customers wherever they are.
Thank you and our next question comes from Brian Nowak from Morgan Stanley. Your line is now open.
Hi, it's <unk> on for Brian.
For taking our questions. We have two the first one if made notable strides in the retail search category over the past 12 to 18 months and there seems to be more to come can you talk to us about which other search verticals, where you are most excited to innovate and evolve around the next lifting the next year or two.
My second question is.
Maybe one on augmented reality you have made some real progress here and now have somebody auto integration Phil.
Sophocles, how do you think about the key augmented reality use cases, you are focused on enabling and do you need an alphabet specific caldwell hardware set to capitalize on the opportunity. Thank you.
When we had to take the second one first in an augmented reality you know we have for a while b. We are deeply focused on you know thinking to computing for the long term you know we've talked about ambient computing and you know, it's just a matter of time before.
You know beyond phones, you'll see other successful form factors and and E. R is an exciting part of that future. We are looking at all the deep investments we need to make a you know I think it's going to take some time and so for example, when you look at something like Google lens or when you look at the fact that.
We are making search work in a multimodal way or when you think about Youtube and making sure it works well.
E R. A R world. So we are obviously investing in all of our services.
And beyond that from a computing standpoint, a boat you know both our you know.
Hardware teams as well as our platform teams are thinking too definitely and it's it's it's going to be a major area of investment for us.
On the first question about our you know I think Phillip spoke about shopping we obviously you know.
Searches part of what makes it so successful is our people use it for a wide variety of use cases, and so we really in Ms comprehensively across all experiences be it local and map speed images speed videos and so we are definitely investing a lot of people do come to search for.
Education as well so you know, making sure we have comprehensive health has been a major focus, particularly through the pandemic and so are the strength of searches bulletin, its depth and breadth and so and then in getting it right with the high focus on quality and we'll continue to do that.
Yeah.
Thank you and our next question comes from Doug Anmuth from Jpmorgan. Your line is now open.
Thanks for taking my questions I have two.
I was just curious if you're seeing any impact at all from the Apple iOS changes in your business, perhaps particularly in Youtube and then second given retail the biggest driver of services growth and of course, Youre really just touching all parts of the economy.
Any more commentary on how you are thinking about supply.
Her shortage dynamics in the fourth quarter, and if you're perhaps seeing anything thus far there. Thank you.
Thanks for the question I'm, starting with the I O S 14 changes. So overall as we said we're pleased with the strength across our business in the third quarter. It was broad based it was global in terms of the ILS 14 changes specifically they had a modest impact on me two revenues that was primarily in direct response.
I think you know as you all know well focusing on privacy, it's been quite a while we've been doing it consistently and let me have phillippe take you through some more on that.
Yeah. So from our standpoint, we see a T. T is one aspect of the many broader ecosystem changes that are underway and we've been investing in privacy preserving technology for many years. All focus is on supporting developers small and large advertisers creators publishers. So that they are able to mitigate impact to their businesses and we really see the future of digital advertising.
<unk> build on advances in privacy preserving on device technologies, which support a free and open internet and obviously a robust ads ecosystem.
On your supply chain a question I would say performance in Q3 was strong across ads revenue lines regions and nearly all verticals.
In line with the widespread reporting of supply chain weakness in the auto industry, we've seen some impact on vehicles within the auto vertical.
Which started earlier in the year, although the impact has really been offset somewhat by increased demand in related areas like parts accessories repairs and maintenance.
Yeah.
Great. Thank you.
Thank you and our next question comes from Justin Post from Bank of America. Your line is now open. Thank.
One for Sundar and one for Ruth Sundar Martin have been strong this year and I think the depreciation changes helped can you just comment on how you see the current investing spending levels of the company or you're in good shape.
Anything where you might be increasing investment and then for Ruth.
There are news about play store fee cuts on the subscription piece, how do you how do we think about that may be impacting the business in 'twenty two when those start to take effect. Thank you.
You know at a high level look I mean, I have taken a long term view and you know we're obviously you know investing both in our in foundational technologies like AI and just deep deep computer science. So we're all in and and applying it across a prioritized set of areas and so no change in the framework if anything.
You know I do feel that the digital transformation underway.
If anything we feel a sense of urgency to execute against the opportunities. We see so still till working within the long term framework maybe repertoire. Yeah. If I can just add on the margin and then go to your second part of that question just a bit of context on the third quarter here.
An important 0.0 for yourself evident is that the improvement in the Q3 operating margin does reflect the strong revenue growth in the quarter and as I said on the second quarter call. Some of our costs are less variable in the short term such as depreciation and the operations costs of our data centers and we did have a gross margin benefit from this in the near term.
But consistent with M centers comments themselves. Yeah, we do continue to invest here and then to support long term growth across both vehicle services and Google Cloud, we're continuing to invest at a meaningful clip across head count compute sales and marketing I noted the headcount increase in Q3 of about 6000, and we do expect the pace of hiring to remain strong.
Long that the benefit from the change in useful lives was obviously in the quarter as well and that benefit does diminish it doesn't it's lower in the fourth quarter. So just to put some of that in context in the centers that we are continuing.
To invest in the business focusing on long term growth.
With respect to the play changes you know again, just as it relates to this quarter and I think that as I said in opening comments. The key point to note there was that or salt slap that this you know the strength that we had in in any going into the pandemic from user engagement and that that contain seeing user engagement.
But yes, there is a a reduction in the fee that kicks in that's one that we just announced last week. It kicks in as of January 2022, and and well, let you do the modeling on that.
Thank you.
Thank you and our next question comes from Mark Mahaney from ISI. Your line is now open.
Thanks, two questions is there anything that suggests that some of these ATT.
Headwinds for other people in the industry actually cost shifts in budget over to your platforms. Your different platforms and then that's for Philip and then Ruth just on the margins is there anything other than revenue overage that really strong revenue performance flowing against fixed costs and the extended depreciation schedules thats, causing those margins to rise or have you been able to.
Workout Eke out tweak out new efficiencies in the model itself. Thank you very much.
Oh, so why why don't I start on that and you know it could be the key points as I said is it starts with strong revenue growth and just timing lags and if some of the costs are as I said are you.
You know kind of more effects in the near term, but we do continue to invest in you can see that in gross margin you can see it in operating margin and we are continuing to tape to invest to support growth, we see in both Google services and Google Cloud.
You you start up leveling the question.
We've consistently said lets firstly that our focus in capital allocation is investing for long term growth and innovation and making sure that we remain focused on that that those long term opportunities at the same time, we've consistently I also said that it's important to ensure that we're.
Being sharp about investments within each product area and we're continuing to do that and we're continuing to focus on investing in what we call operational excellence to ensure we can deliver for all of our stakeholders in a high quality way and that includes all of our efforts around privacy security and content moderation. So here, you're seeing us continue to invest there I bet. It puts and takes we're trying to.
Ensure that we're setting up all of the areas to deliver for a long term high quality performance and end results.
You know on on the on the first question around AD budgets and shift and stuff are you know I don't I don't think there's anything.
Notable that we have observed to comment on.
Thank you very much.
Thank you and our next question comes from Brent Thill from Jefferies.
Your line is now open.
Thanks on Google Cloud, we continue to hear from the partners that the deal size is building in big query is having a big impact for a lot of your customers can he.
Can you just talk to you and expand on on what you're seeing there and any other noticeable trends that you're seeing now that maybe you hadn't seen in the past. Thank you.
Oh. Thanks look overall, you know we continue to see strong momentum. The team is executing well you mentioned, a big query data analytics and AI continues to be a kind of a foundational shift for for what companies are trying to accomplish and liquidity.
Stan stand out there and we are definitely seeing a continued momentum there it's a source of strength.
Other areas I would highlight our security continues to be an increasing area of focus and a differentiator for us given our.
You know over two decades of investment via have had pioneered.
Pioneered zero trust and so on so as cyber security, you know elevates and concern across across companies I talked to and the Ceos, it's definitely being in the area.
Multi cloud continues to be a differentiator I do think customers are increasingly looking for it.
And we've embraced it from early on so that that is an area as well, but above all I think you know we are very very focused on industry value propositions. So really you know sharpening our solutions by vertical and and that's that's really helped US you know get some of the bigger deals you mentioned as well.
Continue to doing that.
Thank you.
Thank you and our next question comes from Michael Nathanson from Moffatt Nathanson.
Your line is now open.
Thanks, I have one for Sundar and then one Sundar you talked earlier about the Geophone next launch next week in India.
I Wonder if you can talk about the long term opportunities after that in India.
From opening up that product in Asia.
Any type of timeframe. When you think you will see maybe the benefits of what youre doing on the low price from them there and then.
It just seemed longer term as more of a targeting becomes more difficult to do all of these privacy changes.
Does it has to be a mix shift in budget. So I wonder how you think.
The value proposition of search will change going forward.
What can you do even more than you've done before to take advantage of what looks like.
Challenges in the ability to target and measure it comes to mobile search I mean, when it comes to mobile.
Mobile advertising thanks.
On India. Thanks for the question.
Look I think obviously you know the pandemic has been hard but through it all.
You know there you know.
People are.
Looking for Axis, and there's definitely been a wave of people who have adopted a.
Smartphones and and there is still be see the demand for people looking to shift from feature phones to smartphones and so part of what excites me about the upcoming partnership with G. O and building a phone is really investing beyond just English and getting languages and getting the local needs right for people in.
And doing it in a way that many more people can take advantages of a smartphone so I view it as laying the foundation you know it's a version of digital transformation and it's palpable the demand we see and I think you know are you know over a three to five year time frame, you'll end up having a lot a lot of impact, but overall, India just.
Asia Pacific continues to be an exciting market for us we see strength across the categories. We are involved in and so you'll continue to see us stay focused there.
And to the second part of your question look as I said, we see the future of digital advertising being build on advances in privacy preserving on device technologies.
It's a big area that we've invested already in that where you're going to invest in even more and as far as how we think about our runway for growth, we really think about improving user and advertiser experience for years and years to come in and we're always asking ourselves. The same questions right. How do we drive better answers to coreys, especially on search, especially including those with commercial intent now how do you.
Use machine learning to deliver even more relevant and higher quality experiences for users.
Then drive higher clicks and more conversions for advertisers. So really our main goal is to consistently deliver great experiences for users and drive incremental value for our partners and making them successful and as long as we do this and we continue to invest in the privacy preserving technologies I mentioned, we should continue to see budgets move our way.
Okay.
Okay.
Thank you and our next question comes from Ross Sandler from Barclays.
Your line is now open.
Hey, guys. It's just at a high level question on Youtube.
So you're obviously doing really well there.
As large as it is and as high as the engagement as compared to just about any other app that we see across the broader internet.
The revenue.
Around 30 billion this year.
In comparison to you know core Facebook or Instagram.
So do you think that you know this is obviously a huge opportunity for you to especially with connected television.
Is there something that you guys need to change about your approach.
Either direct sales or kind of decoupling search from Youtube and some of the other products that are like Google has under the same roof.
Or do you kind of think continuing along the same path is the right strategy for Youtube, specifically any color on that would be helpful.
Look I think you know obviously, a Youtube is unique in the sense that it's it's a true video native video first product from day, one and so you are dealing with a new form and obviously as a company.
I think we've taken a long term view, which is why you see.
The engagement on the product it's working at scale content responsibility has been our most important focus for the past many years.
And beyond that I think we have worked hard to make sure both careers.
Can can and can do well and you know I mean, it's a great platform for advertisers.
We've had strength in brand we built on it with the throw this momentum in direct response.
Theres, obviously, a newer opportunities such as shopping which we are investing in and and shots represents an additional early but important area for us from an investment in our growth standpoint, So I I feel the fundamentals of the platform are strong and are with.
A long term view I see I see this as an area, where we have more upside and so we'll continue our investments with that in mind.
Yeah.
Thank you and our next question comes from Colin Sebastian from Baird. Your line is now open.
Thank you a couple of big picture questions Sundar first off looking at G. C P.
And some of the innovations you've talked about like distributed cloud I just wonder what you think the long term future as for hybrid cloud environments are.
Are they really or is this really just the part part of the process are stepping stones to bring more companies or most companies over the full cloud adoption.
And then secondly, we're seeing a clear blurring of the lines among e-commerce digital payments and social platforms. So I was hoping you could share the vision for Google and Youtube and the other Google apps in this context, how those pieces fit together as a closed loop shopping platform. If that's the right way to think about it. Thank you.
You know to your first question on G. C. P. You know part of our strength is our you know the b if taken a very open and scalable and flexible approach.
And you know, we we don't view it as a one size fits all so we want to meet the customers to be they they want to take this journey.
And I think are gearing up to support them both from a multi cloud from a hybrid cloud standpoint, but I do think you know I do think over time are you know when you when I look at the scale at which we are investing to support particularly to my points earlier around security and so on I think people will see the value more so I valley more of.
Of our hosted cloud solution, but I think we you know we want to be customer centric here and then you know we want to go where the market goes and you know that that's why we've built a build a scalable infrastructure. We have so I'm excited about the opportunity there.
On your second question around E Commerce digital platforms shopping social how does it all fit together.
For me I see there's two things one is we want to get the primitive strike, which means as a user are being able to you know.
Beat in search and Youtube are either on on the products or as you. You know we are trying to connect merchants to use it straight and be organically or through advertising and so we are investing an item to be payments, making sure. It's seamless for users and so that's a big part of her focus the second is really from a user.
B in standpoint, both in search and in Youtube and other areas like maps and discover over time, if we want to make sure. If users want to act more beyond discovery and they want to do more that it seamless to do so, but we're going to be very focused on making sure for merchants that are you know that they can they get access to users and and and.
And that's the value proposition, we deeply care about and so we'll invest would that be when Mike.
Okay. Thank you very much.
Thank you and our last question comes from the line of Stephen Ju from Credit Suisse. Your line is now open.
Okay. Thank you so sundar I think in the past we've talked about the intersection of hardware and software for Google.
And you know you touched on the pixel fix as well as the other examples in your prepared remarks, but what is it.
Look at all the different direction that youre going with Fitbit.
All the other devices. So how has your thinking evolved over the years and you know what do you envision a hardware and software integrated Google meeting to the consumer over the longer term.
And I guess I'll fill up if you look at some of the emerging and developing markets today.
Some of the companies that are around the world I've had to play multiple roles in helping to solve for transactional friction by rolling out payments logistics and other solutions that we probably take for granted here in the states. So.
Do you think Google should or could play a more expansive roll in India and some of the other emerging markets to help accelerate the growth of e-commerce versus the role that you played in the U S in the west.
You know in the overall hardware and computing you know obviously you know we.
You know we have been doing this for a while now you know if you look at the Google tends to Tibet decent multiyear bets, which are you know, which finally play out and I couldn't.
Couldn't be more excited at the reception for pixel a pixel six in Google terms her and I think that you know as lays a good foundation of what we wanted to do in the future.
We definitely have a long term view on where computing is headed we want to make sure I.
And to innovate there you have to think of the intersection of user experience software and hardware I think we have a unique perspective to bring a unique point of view with our AI first approach and applying that to bring bring new features and new experiences. So we will be doing it to push computing forward, we want to guide our ecosystem.
We do well in that category the whole ecosystem benefits from it and and finally, we're going to be doing this with a view towards building a sustainable business and we see this as an important area and we are investing with that viewpoint I'm really excited I, you know with with what Google to answer on the pixel 16 is being able to accomplish and maybe you were just asked.
Stuck.
So on the second part of your question look every commerce experience is also a payment experience and friction laden checkout can take the joy out of a purchase I think we've all been there.
So think about Google pay as a checkout facilitator, we want to make it even easier for consumers to access whatever payment method. They really one credit card Paypal shall pay and so on and so on and to the global nature of your question. The 150 million people across 40 countries Arnaud using Google pay to managed transactions and stay on top of their finances and millions of them.
They're using it and to provide their customers with a simple and safe way to check out and whether it's in store online or via their app. So right. Now we continue to be very focused on helping both merchants and financial institutions create more intuitive digital experiences and connect with their customers.
In the U S. We're partnering with merchants to surface become card linked offers and coupons within Google pay and in August we announced the partnership with a C to a fintech company in India that was a part of your question until abusers open fixed deposit accounts directly from Google pay. So we think there's much more that we can do for both consumers and our partners. So.
Say tuned on this one.
Thank you.
Thank you and that concludes our question and answer session I'd like to turn the conference back over to Jim Friedland for any closing remarks.
Thanks, everyone for joining us today.
We look forward to speaking with you again on our fourth quarter 2021 call. Thank you and have a good evening.
Thank you that concludes today's conference call. Thank you for participating you may now disconnect.
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