Q2 2019 Earnings Call
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I'd now like turn the conference over to Ellen West Head of Investor Relations. Please go ahead.
Thank you good afternoon, everyone and welcome to alphabet second quarter 2019 earnings Conference call.
With us today are Sundar Pichai Andrews, perhaps.
Ill quickly cover the safe Harbor some of the statements that we make today regarding our business performance and operations and our expected level of capital expenditures may be considered forward looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially for more information. Please refer to the risk factors discussed in our most recent Form 10-K filed with the FCC.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in todays earnings press release, which is distributed and available to the public through our Investor Relations website located at <unk> Dot X Y Z Slosh Investor and now I'll turn the call over to Sundar.
Thanks Alan.
Q2 was an exciting quarter Google.
We made several big announcement today, you you'd you'd spend cast and Google marketing life.
They're all part of a broader vision to build a more helpful. Google for everyone.
When we say everyone be mean uses developers creators partners.
Advertisers.
And all the customers so far growing cloud business.
And the communities be called home.
From the beginning Googles mission has been to all the nice towards information and make it universally accessible and useful.
Over the years, we have evolved from a company that helps people find answers to a company that helps you get things done.
Today I'll share how we are approaching this work.
The next generation assistant and process stick with up to 10 times faster.
Making it easier to multitask compose emails and even work offline.
It features like duplex on the bad.
That system will soon be able to help uses book rental cars and buy movie tickets.
If you're searching for the fastest be home Google maps will now tell you when you're buses delayed or how fast you an extreme movie.
We have rolled this out to people in 200 cities worldwide.
Google maps can also help people stay safe in times of crisis.
Last month, we added more visual information under new navigation warning system to help you understand that a natural disaster is better and the speed that it may be headed.
Building a more helpful. Google for everyone means that everyone should be able to access and enjoy our product.
That's why we are applying the latest advances in AI to dramatically improve experiences for people with disabilities.
One example of this is captions.
Which make gone to more accessible to the almost 500 million people in the world, who are deaf or hard of hearing.
In Android Q, we can now add automatic like options to 80 media playing on your phone such as videos podcast and wants to me.
We had also developing technology for the next billion users coming online in places like India, Brazil and Indonesia.
Yesterday, we introduced the gallery go up it's a before people living in low conductivity areas to manage their photos and videos while off line.
But we'll photos continues to be a one off our most popular and beloved province.
Now with over 1 billion monthly usage.
And we are excited by the potential of gather to go to bring these benefits to the next billion users.
Building for everyone also means ensuring that probably the seas equally available to everyone.
In Q2, we announced privacy improvements to give use is clear choices more control around our data.
We are making privacy controls more easily accessible.
Expanding our popular in called me dual mode, the maps and adding new order lead controlled.
And we continue to challenge the notion that products need more data to be more helpful.
For example, the invented a new technique called Federated learning that allows us to train him autos and make product smart or without draw data, leaving your device.
To make products work, even harder for you.
We have continued to invest in our hardware business, bringing together the best of Googles hardware software anyway.
But I O. We introduced some new additions to our hardware line up including picks up three and Dixon Threeeight excel.
By taking advantage of our leading software capabilities, we can offer users a premium phone experience at a much lower price point.
With the launch of fixed for three in me or Olympic City unit Phase in Q2 grew more than two at year over year.
In addition to Verizon and the Google store, we successfully expanded our distribution to T. Mobile sprint you a city the spectrum mobile now additional partners, which is greatly diversified our sales footprint into Europe .
Finally, it also pleased that the big since the launch was met with our highest net promoter score ratings to date.
We'd also doubling down on creating a helpful home.
Bringing all of our home products together under the net spread.
In Q2, we launched the nest hub in 12 additional countries.
The man Cros are helpful home products continues to increase.
As we expand to new market.
Our new Google Nest hub, Matt Weiss activated smart display part by the Google Assistant will be available later this summer.
Stay tuned for even more on hardware this fall.
Beyond hardware be continued to develop the open platforms and ecosystems that bush computing forward, such as Android, Google play and cruel.
Oh, the Io, we showed some exciting improvements to Android Q.
The first operating system to support Fiveg.
Include support for portable phones.
And that's nearly 50 updates focus on security and privacy.
Including more transparency and control or location data you shared with that.
And we continue to feel the excitement from use of the stuff on a bus and publishers.
Following the announcement of our new gaming platform stadia.
The recently announced pricing availability and know what 30 games coming to stadia in time for the consumer launch in November .
Another area, where we are investing deeply you too.
Everyday users come to you tube to learn new things.
As a result, you tube has become one of the world's most accessible educational platform.
We see strong growth in a number of areas.
Creators continued to build engaged fan bases on you tube.
Channels with more than 1 million subscribers grew by 75% year over year.
Thousands of channels have double the total monthly revenue by using new monetization products like Super chat channel memberships and manage.
And be building momentum with our subscription services.
Good music and you do your premium now available in over 60 countries up from play markets at the start of 28.
Hi, Brent cast we introduced two important changes that help advertisers reach new audiences with premium content.
First knew you'd you bored you don't see these movies and live events.
Well soon be made available free supported by <unk>.
Second you tube TB, but its 70 plus channels will be accessible as a standalone lineup in Google preferred.
As we continue to invest in the platform responsibility remains a top priority.
One significant change we made in Q2 was to update our hate speech policy.
And we continue to be vigilant about removing harmful content quickly netscape.
In the first quarter alone be removed more than 8 million videos that flight aided our community guidelines.
The vast majority of those videos, but flat by machines and removed before getting a single view.
We're also working to raise a high quality content and support our creators who are our next generation media business.
These are a few of the many investments we've made to protect the community. The work is ongoing and be a committed to it.
Moving from Youtube broader advertising platform.
At Google marketing life, we introduced new AD formats, such as discovery, yet, which offer a new visually rich mobile first AD experience across Kulu property.
We also announced a unified shopping experience and Universal chopping car all of which helped to make Google more shoppable.
We also now in school, who travel a new centralized travel destination.
Where people can plan on organize all aspects of that next trip all in one place.
From booking flights and accommodations to planning activity.
Now onto our cloud business.
Q2 was another strong quarter for Google cloud, which reach an annual revenue run rate of over $8 billion and continues to grow at a significant pace.
Customers are choosing Google cloud for a variety of reasons.
Reliability and uptime are critical retailers like Lowe's are leveraging the cloud that's one of the important tools to transform the customer experience and supply chain.
Customers need flexibility to move to cloud in their own b.
And that was announced earlier this year provides advanced security an open architecture.
To support multi in hybrid cloud and we're on.
That's important to many companies, including financial services customers like it just B C and you apply and I'll just keep it.
Scalable data management and analytics solutions are another strength of Google cloud.
What a phone is using cloud to drive real time customer network analytics and bright inside a leading healthcare platform for connected devices and drugs.
Uses our solutions to improve security and compliance.
Finally, Google Cloud AI and most solutions are also helping health care organizations like Sanofi.
Accelerate drug discovery, and a bunch and improve the health care experience and outcomes.
We continue to build a world class cloud deemed helps support our customers and expand the business and not looking to triple our sales force for the next few years.
Finally to support our rapidly growing cloud customer base.
And all of Google services globally, the broke ground on three data centers and launched our new let's talk about cloud region. The seven in Asia Pacific.
We also announced plans for a new cloud region in Las Vegas or someone in the United States.
Lastly be on investments in products, we're investing significantly in the communities where we operate.
In Europe , we recently announced a 1 billion euro data sentry investment in the Netherlands, as well as the opening of our Google Safety Engineering Center in Munich, Germany.
And right here at home, we announced a 1 billion dollar investment in housing across the Bay area.
To help address the chronic shortage of affordable housing.
Earlier this week, we invested $50 million in housing Trust Silicon Valley stuck fun.
Which furthers our goal to help community succeed over the long term and expands access to housing for those who need it.
Finally, I'm excited that Google is an official supporter of the Olympic and Paralympic Games, Tokyo 2020.
Particularly special since that's where we opened our first international office back in 2001.
I had of the games, we are working with the city of Tokyo, They ensure Japanese businesses can better serve new customers on health as it is make the most of the time, they're using products like search maps and translate.
At Google, we feel incredibly privileged to have the opportunity to help so many people every day in moments big and small.
There are many reasons to be optimistic about the debt extend technology staking from the applications of AI to address disease to the potential of quantum computing to deepen our understanding of the world.
I want to thank googlers around the world for another great quarter with that I will hand, it over to <unk>.
Thank you Sundar in the second quarter total revenues of 38.9 billion were up 19% year on year and up 22% in constant currency.
Once again, our results were driven by ongoing strength in mobile search in particular as well as you tube and cloud.
I will begin with a review of results for the quarter on a consolidated basis for alphabet focusing on year over year changes.
I will then review results for Google followed by other bets and will conclude with our outlook. We will then take your questions.
Let me start with a summary of alphabet is consolidated financial performance for the quarter.
Our total revenues of 38.9 billion reflect an acceleration in both reported and constant currency revenue growth across all regions compared with the first quarter.
Details of our results by geographic region are available in our earnings press release.
Turning to profitability on a consolidated basis total cost of revenues, including CAC, which I will discuss in the Google segment.
Was 17.3 billion up 25% year on year.
Other cost of revenues on a consolidated basis was 10.1 billion up 35% year over year, primarily driven by Google related expenses.
The biggest contributor with cost associated with our data centers and other operations, including depreciation.
Followed by content acquisition costs.
Primarily for you tube and mostly for our advertising supported content, but also for our newer subscription businesses you to premium and you to TV, which have higher cash as a percentage of their revenue.
This line was also impacted by growth in hardware costs associated with the launch of our line of mid tier pixel Threeg smartphones.
Operating expenses were 12.5 billion with head count growth as the largest driver across each of R&D sales and marketing and G and H.
The biggest increase once again with an R&D expenses, reflecting our focus on product innovation.
Growth in sales and marketing expenses also reflects an increase in advertising and promotional expense primarily for the launch of our pixel three a line up.
Stock based compensation totaled 2.8 billion.
Headcount was up 4187 from last quarter and consistent with prior quarters. The majority of new hires were engineers and product managers.
In terms of product areas. The most sizable head count increases where again in cloud for both technical and sales roles.
Operating income was 9.2 billion up 13% year over year, excluding the impact of the easy fine in the second quarter of last year for an operating margin of 24%.
Other income and expense was 3 billion, reflecting sizable gains which are primarily unrealized from investments made by capital GE GE v. and more broadly at alphabet.
We provide more detail on the line items within a whiny in our earnings press release.
Net income was 9.9 billion in earnings per diluted share were $14.21.
Turning now to Capex and operating cash flow.
Cash capex for the quarter was 6.1 billion, which I will discuss in the Google segment results.
Operating cash flow was 12.6 billion, but free cash flow of 6.5 billion.
We ended the quarter with cash and marketable securities of approximately 121 billion.
Let me now turn to our segment financial results starting with the Google segment revenues were 38.9 3.8 billion up 19% year over year in terms of the revenue detail Google sites revenues were 27.3 billion in the quarter up 18% year over year.
In terms of dollar growth results were led again by mobile search with a strong contribution from you too.
Followed by desktop search.
Network revenues were 5.3 billion up 9% year on year continuing to reflect the performance of the primary drivers of growth within network, namely Google AD manager followed by Admob.
Other revenues for Google were 6.2 billion up 40% year over year fueled by cloud with an ongoing strong contribution from play.
With <unk> cloud growth in GCP was once again the primary driver of performance with strong customer demand for our compute and data analytics products.
G suite continues to be a valued set a productivity and work transformation apps with results benefiting from both new pricing and seek growth.
Plays the results were driven by strong growth in the number of active buyers.
Hardware benefited from the successful launch of our pixel three a smart phones.
We provide monetization metrics in our earnings press release to give you a sense of the price and volume dynamics of our advertising businesses.
Total traffic acquisition costs were 7.2 billion or 22% of total advertising revenues.
And up 13% year over year.
Total Tac as a percentage of total advertising revenues was down year over year, reflecting primarily a favorable revenue mix shift from network to sites.
The sites Tac rate increased year over year, primarily due to the impact of the ongoing shift to mobile which carries higher Tac offset by the growth in tax free sites revenues, primarily from you too.
In Q2, the network Tac rate declined year on year, primarily due to a favorable product mix shift.
Operating income was 10.4 billion up 16% versus last year and the operating margin was 26.8%.
Accrued capex for the quarter was 6.9 billion, reflecting investments in office facilities and Datacenters followed by servers.
Let me now turn to and talk about other bets.
Revenues were 162 million, primarily generated by fiber and fairly with an operating loss of 989 million.
I'll note a couple of key recent accomplishments. We know now has over 1000 active writers participating in Waymo, one and has reached 10 billion miles driven in simulation.
Waymo also announced that it has entered into an exclusive partnership with Renault and Nissan to explore driverless mobility services for passengers and deliveries in France and Japan.
<unk> was once again able to step in and provide connectivity in the aftermath of a natural disaster. After the recent earthquake in Peru.
This follows previous deployments of living after hurricanes in Puerto Rico and floods in Peru.
Let me now conclude with some comments about our longer term outlook.
Based on the strength of the U.S. dollar to date relative to the third quarter of last year. We expect continued FX headwinds again in the third quarter.
As a reminder.
S X headwinds affect both revenues and operating income given the majority of our expenses are in the U.S.
Turning to revenues, we are pleased with the ongoing momentum in our revenue growth, especially on a base of nearly $150 billion in revenues over the last 12 months.
With respect to sites revenues the strength in the second quarter again reflects our ongoing innovation in part from the benefits of applying machine learning.
We remain confident about the ongoing opportunity set.
And within other revenues once again cloud it was the largest driver within other revenues and the third largest driver of revenue growth for alphabet overall.
In fact in the second quarter of 2019, as Cindy mentioned the annual run rate for cloud revenues was over $8 billion and cloud continues to deliver significant growth.
In terms of our hardware business, we were pleased with the reception of the pixel three a line up of mid tier smartphones in the second quarter and look forward to the fourth quarter launch of our newest devices some of which we showcased at Io.
Turning to profitability with regard to Google operating expenses, the second quarter results. Once again reflect our ongoing commitment to investing for the long term.
At this point, we expect that our 2019 head count growth rate will be closer to the 2018 rate in other words slightly higher than we originally forecast for a couple of reasons.
Strategically we are increasing our hiring in cloud in our incorporating the impact of the look or acquisition, which we expect to close before the end of this year.
And operationally, we're taking steps to optimize workforce deployment by moving certain customer support functions in house, which is both opex neutral and enhances operational effectiveness.
As a reminder.
Head count additions tend to be seasonally higher in Q3, because that is when we bring on new graduates.
In terms of sales and marketing consistent with prior years, we expect sales and marketing to be more heavily weighted to the back half of the year to support the holiday season.
In other bets, we continue to invest meaningfully for the long term opportunity we see.
Turning to Capex and capital allocation.
To give you more insight into our investment in capital expenditures I will discuss the two major components of Google Capex separately.
First the majority of our Google Capex is what we refer to as technical infrastructure, which consists of our investments for compute storage and networking requirements and includes data center land and construction servers and network equipment.
The second category of Capex is for our office facilities, including acquisitions ground up development projects and related building improvements.
In the last couple of years within Google Capex.
On average approximately 70% was for technical infrastructure and 30% was for office facilities.
Both the split between the two components and year on year growth rates can vary significantly from quarter to quarter due primarily to the timing of sizable purchases of office facilities.
For example.
In Q1 technical infrastructure was about 80% of Google Capex, whereas in Q2, it accounts for about 60% due to the purchases of office facilities, we made in the quarter.
As we discussed on the fourth quarter call. We believe there are two important factors when considering our pace of Capex investing.
First we expect the overall growth rate will moderate quite significantly for the full year 2019 versus 2018.
Second in terms of the mix within technical infrastructure, we expect to see more of an uptick in 2018 and data center investments relative to servers in contrast to the ranking in 2018.
Growth in technical infrastructure is designed to support in particular, our efforts in machine learning across our businesses as well as to support growth in cloud search and Youtube.
With respect to capital allocation, our 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 an additional $25 billion of our call at C capital stock.
In conclusion, we are confident about the opportunities ahead and continue to invest thoughtfully for the long term, we will now take your questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
<unk> any background noise, we ask that you. Please mute your phone. After your question has been stated.
And our first question comes from Eric Sheridan from U.B.S. Your line is now open.
Thanks for taking the question I really appreciate all the additional commentary of disclosure in the remarks, I think investors will find that's really helpful.
So Don maybe for you one bigger picture question, a lot of innovation on the product side or in the early part of this year and now those products are going to start getting rolled out in the back part of this year and into 2020 can you give us a little bit of additional color on what some of the key investments you're making some of the key themes you're trying to drive after in terms of pushing the organization to collaborate on product launches and leveraging the strengths within Google and then the second part of the question would be as you lower friction for consumers on the product side. What are you hearing from advertisers on the monetization side about how those products might resonate on the monetization. Thank you so much.
Thanks, Eric Oh on in terms of the key investments you know still continue.
You know we have a view of being focused on our investments and so that continues to be kind of a foundational investments we are making across the board, including getting a lot of our engineers are trained on AI techniques. It's about across the board. So it's it's an important area we are focused on.
And and you know making sure.
Oh, you know digging deeper to push our products to be more helpful. You noticed them because the main theme by which we are evaluating.
Everything we do beyond that.
You know be it beard, you know the focus on cloud has been a big part of it continuing to scale up you tube, including being focused on content responsibility.
These at all or some of the key things we are doing and of course, Oh, you know deep focus on search and assistant being a core part of everything we do.
In terms of the work we're doing on consumers and they bought it does on monetization and I do think they go hand in hand.
Yes, we are making the experience better for consumers, including on products like discover so just getting getting information to them more seamlessly when they need it.
<unk> Oh, you know tend to have a commercial aspect of the light didn't gunman uses that are interested in it.
And so I've always seen them go hand in hand, and so you know taking a long term view I think oh that was made on the monetization side as well.
Thank you for being a bit on that question and the impact from some of the announcements that you've seen from US you know those comment a bit on the impact from a Google marketing lives at Synta referenced at the outset I think what's notable here is that every year at G.M.L., we announce new changes to products and features and most ads product launches are introduced in phases as advertisers initially experiment with new formats and so as a result.
I'm, the new products that and now that were announced at GML typically are adopted overtime and so just wanted to add in here because while we're excited about the new AD products, we announced the G.M.L. last quarter, given they offer great new user experiences across new services. We don't view this year's slate of launches differently from introductions that need in previous years.
Thank you.
Thank you and our next question comes from Douglas Anmuth from JP Morgan. Your line is now open.
Great. Thanks for taking the question I'm, just hoping you could talk a little bit more just about the accelerating growth that you saw in Twoq you relative to the the slowdown that we saw in one Q. It seems certainly in the previous quarter to skew more to the Google search side, then you too, but I was just hoping you could provide a little more clarity on maybe how the product changes that you've talked about in the past played out [noise] across one Q into Q.
And then just under on a user privacy and control over data there was certainly a key theme across the multiple events into Q.
Can you just talk about how you balance those initiatives as you're rolling out products going forward. Thanks.
So starting first with the the strength insights revenue you know that the strength, we talked about here. This quarter reflects the same underlying trends that we discussed previously and I tried to really call that out and in opening comments in part it's the benefit from applying machine learning to both the user and advertiser experience and it really just you know on echoing a lot of what we've said in prior quarters last quarter as well we remain very positive about the opportunities that yeah. We we introduced product changes only after extensive testing, which means there can be some variability in quarterly growth rates as you've seen 'em, but <unk>.
Our very positive about the opportunity set and you know overall as it relates to both search and Youtube a strength you know I'd just add on you tube revenue growth for you too was strong in the first quarter. In fact, we called it out as the second largest driver of revenue growth across alphabet and in the second quarter you tube was again the second.
Largest contributor of of revenue growth and you know really really pleased with the ongoing a momentum that we're seeing here.
On on user privacy and control, it's always been a big focus for US and you know in some of the things we recently announced.
No other initiatives underway for example, like Federated learning for almost three years so.
Going forward I think you'll continue to see us focus on it. It's one of the most important areas we are working on.
But I think with <unk>. We are excited that you know we can give the give better experiences for users with less data over time, and you know and those are the kinds of better since we are pushing.
We had also we will you will see us continue to work hard to.
Simplify use our understanding of how their data is used them, giving them better controls and making it more easier for them to manage and making sure more users actually exercised those controls so those at all our goals and we'll continue focusing on that as we move forward.
Thank you Bill.
Thank you and our next question comes from Stephen Ju from Credit Suisse. Your line is now open.
Okay. Thank you so with regards to the the cloud.
<unk> billion in annual run rate commentary just wondering if we can get some clarification does this.
Include G.P.S. Wallace G suite further is this apples to apples to I guess, the $1 billion, but I think sundar talked about I think that was during the fourth quarter of 17.
And any other commentary you can add there in terms of the mix between I guess, you know that for sure the more GCP versus <unk>.
Our traditional G suite.
Thank you.
Yes. So it does include a the entire business said Thomas Curran as leading our cloud business includes both GCP and G suite.
And it is on an apples to apples basis. It continues to be the business. The club business I'm, we're not breaking out the components of cloud as I tried to indicate in opening comments pleased with the performance of both.
D.C.P. and G. sweet growth and GCP was led by strong customer demand for our compute and data analytics products and G. Suite continues to deliver strong growth as I as I noted in opening comments with results benefiting from both new pricing and see growth and overall TCP remains one of the fastest growing businesses in an alphabet and we're really pleased with how the team is executing on both.
Thank you.
Thank you and our next question comes from Heather Bellini from Goldman Sachs. Your line is now open.
Great. Thank you very much and and I'll just echo People's comments about about the new disclosure. It's much appreciated. So thank you so much for sharing.
I wanted to ask Sundar, how you've seen your go to market and partnership strategies change under Taunus. It does seem as if Google has become the more friendly cloud company. If you will from a you know when you think about partnering with other software companies and I'm wondering if there's any tangible benefits you can point to because the best whether it's in win rates our partner momentum or anything else that you can call out and then I also wanted to ask you obviously made the acquisition.
Look or recently, how you're thinking about organic versus inorganic product development and I'm. Just wondering has that thought process there changed with kindness running running the business now thank you.
Thanks for that appreciate it you know definitely go to market promise has been heavily focused on that.
Mainly the realization that to be a very comprehensive are going to be there in the banks and ER and so focusing on how we can scale up.
And really build a customer facing organization. So we are investing heavily bead and say is this partner and operational teams.
And as I mentioned in my opening comments, a you know we're looking to triple the size of our sales force over the next few years and you're doing it aggressively in major markets around the world.
Hum specific so we didn't launch our new partner program partner advantage.
Ah, yes, it'd be relationship as being a super important to us and so we have really focused on Dod, helping many customers my cousin kind of four.
Home depot or Cardinal health are some examples of that.
And you know.
Big part of it as being really expanding our customer facing bench, a you know several new senior executive hires.
In addition to our new global head of sales, obviously somebody out at a 25 year customer experienced veteran to build a build out of a customer support.
So I think you're going to see that focus of being a you know so solving customers. We have done it in our other areas. We are used to building ecosystems. If you look at an ecosystem like Android is what we do and so that's going to be a focus for us.
In terms of the second question about.
Organic and buses or inorganic.
I think you know we are clearly focused on are the areas that would be a differentiated data and there's something out there.
It was a key key data management and analytics is a key area for us.
And as part of that we looked at gaps a b have which would help us complete the solution offerings. We have there for customers and that's what drove look at acquisitions. So.
<unk> will be customer focused and to the extent, we see gaps there are gaps anywhere we will obviously look at doing it in house was a set of theirs is an attractive opportunity outside and take it on a case by case basis, but that's where oh it will come from.
Thank you.
Thank you and our next question comes from Mark Mahaney from RBC.
Your line is now open.
I tried to questions. Please refer first Ruth just any color on that 25 billion share repurchase authorization why 25, not 20, not 30 any color there and then when you think about the AD business, we've seen a nice acceleration in Q2, but that's kinda back to norm. There's still this question about what happened in Q1. It was there something that happened in Q1 that you need to correct. In Q2 is it just the normal rhythms of the search and you tube and advertising businesses. So I think Q1 still a little bit of a question Mark Q2 seems like very much the norm of the last several years. So any color on what could have transpired in Q1 and did that require a fix in Q2. Thanks a lot.
Well I'll answer them in reverse order I, you know I tried to.
Comment on that last quarter and reiterated again this quarter.
We are pleased with the ongoing momentum in the business and is that the key point that I'll. Just reiterate is that as much as there is a lot of innovation going on in the business and we've talked about that we introduced product changes only after extensive testing and that means there can be variability and quarterly growth rates I'm as you've seen and so you know where we're pleased with the strength of the business. The team is extremely focused on ensuring we are delivering for users and advertisers and as we're looking out at you know weve talked in the past we have.
Introduce over 100 and enhancements to the user said every quarter and no one change drives results and as we discussed last quarter.
There can be timing variability and and our view is let's let's ensure that we stay focused on the right things for the long term and the quality that we can deliver so you know it's there's there's really not much more to add there and then.
On the capital return I guess you know the.
The main point is we went back to the yeah, we're staying with the same capital allocation framework, we've talked with you about before the primary thing is we remain focused on investing for long term growth and the primary use of capital really is to support that growth and then the second use is really to support acquisitions and investments as we've already been talking about and I'm given the you know the <unk> our outlook on on cash our view was that it was appropriate to step in here again Weve increased our program four times since we began the program in 2015 and pleased to have the opportunity to announce a another increase here today, the $25 billion and I think the main point is we view the repurchase program as an effective use of capital.
Okay. Thanks Ruth.
Thank you and our next question comes from Brian Nowak from Morgan Stanley . Your line is now open.
Thanks for taking my questions I have two that the person who is your your color on you tube was was really helpful and being the second largest driver this quarter and last quarter because of that as a backdrop with the overall celebration.
Can you just give us a couple examples of what types of products or advertiser segments or regions that resonate, particularly well I'm new to this quarter versus last quarter, that's sort of a question for sundar or route. It has been the diesel out in the press about children safety on you too and so I guess I'd be curious to hear for you know for advertisers and parents on the call. What steps have you taken to really make sure that you do that you see for kids and what are sort of the biggest areas you're focused on their shirts stayed that way. Thanks.
So in terms of you to grow its just maybe to add a bit more there given your question as you know.
Already noted that you to revenue growth was strong in the first quarter.
And again strong here in the second quarter.
To clarify you know the changes in in early 2018 that I referenced on the call last quarter regarding sites click and CPC growth were not related to policy enforcement actions that you too they had a negligible impact on you tube revenues just to be really clear that revenue growth was strong last quarter, and and so they click and and CPC growth or unrelated to and actions and policy enforcement in terms in anyway in terms of our ongoing efforts to protect the you tube ecosystem. We do remain focused on taking the right steps in line with our goals regardless of the impact on revenues, but an important point is that our removal of content that violates our policies had virtually no impact on you to revenues and just wanted to make sure that was clear so consistent.
Growth here at going into your the first part of your question.
Where is that growth again, I'm going to reiterate what we've talked about on prior calls that you know we continue to see substantial growth in direct response. So brand advertising is still the largest part of the business. It's growing at a strong pace Ah, but really I would reiterate what we said previously that we continue to see substantial growth in direct response.
And you know in your important question about a good safety you know as part of her content responsibility work. Its one of the most important duty as we focus on.
You will see is a this is why we have put a lot of effort into developing a you tube gets and you know it's a product you're going to see us focus more on continued to evolve add more curated content there and make sure. It's a safe for kids and gives parents peace of mind also ensuring that the content responsibly work applies to family oriented content on a the main you do about this wall. So all the work we are doing or be it. The work we're doing to just a mobile content.
Raised a authoritative content higher quality content and reducing the spread of.
Homeland content to all applies everywhere and you know we really focused on it.
Rewarding clustered creators is a big baby can help.
Ensuring creators who produce content, which is great for children, a rewarding them, it's a thought or two important goals for us.
Great. Thanks.
Thank you and our next question comes from and Salmon from BMO capital markets. Your line is smelting.
Oh right. Good afternoon, everyone. Thanks for taking the question maybe that's for Rousselot, a sooner feel free to jump in first it's the first one here is based on a couple of comments you reminded us of in your prepared remarks about you tube, which was the.
The inclusion of originals and you tube TV into Google preferred inventory.
You've given us a little bit of color on direct response gross at you tube over the last.
Little while can we assume that those two additions were a bit of a boost to the brand advertising side of the business has that's more inventory available for that sort of high quality type of brand orientation that TV advertisers are looking for.
And then just second coming back to Google marketing live notwithstanding your comments or is that it takes some time for products to be adopted are there maybe one or two out of all of those announcements there that you would highlight as being.
Yes, potentially particularly material over the longer term. Thank you.
On the call.
On the first off in terms of.
You too poor Brian you know I mean, just I would I would say, it's more secular across the platform promoting higher quality content. Our work on brand safety conference responsibility.
You know adds up to it.
Also creators just a you know generating a you know better content I think all of all have played a part and a you know so I would say, it's more cross cutting.
On the second thing on GE a mile in terms of things. So you are a excited about to me you know be discovery adds I'm Gallery ads I mean, they both pushing us to its mobile first visually rich immersive AD formats, which as you know, which also offers a really great user experience. So I think I'm excited about changes like that then I think I think they you know they have the potential that is advertised that excitement, but I sort of mentioned it's early days anything we rolled out now you know it takes time to play out, but we definitely see excitement there.
Great. Thanks Hunter.
Thank you and our next question comes from Mark May from Citi. Your line is now open.
Thank you my first for Sundar I think earlier Richard mentioned, the importance of machine learning for driving growth in the quarter and I'm sure.
Quarters.
I believe many have kind of a hard time understanding exactly what that means I was hoping you might provide a couple of specific examples of how the company is leveraging machine learning.
Recently to help drive growth and improvements for.
But to users and advertisers and then.
Secondly for Ruth in terms of the sites talk I know there are a lot of variables that go into changes in sites Tac, but when you look at the puts and takes how do you see that kind of trending over the next year or two thanks.
You know for US you know machine learning plays a critical role Oh across both the consumer user experience and part of a adds to.
You know generally using machine learning to simplify things for IDE, Rice's and make campaigns easier and give them better insights suspended we see a lot of benefit on the AD side. So for example processing complex data sets and you know, giving back sophisticated real time insights a really helps helps make a difference you know and also on the front and you know for marketers, helping them find the right creative for every moment, a you know helping them manage bidding in real time and you know so every step in the consumer journey I think machine learning. If he is just making things more efficient more easier to use and driving productivity for them. So you know that that's what.
Please out please out through our systems.
And in terms of the Tac rate as we've talked about previously that the growth in mobile does put upward pressure on the sites Tac rate and that was the primary driver of the year on year increase in the second quarter and.
We do expect the underlying trend to continue given the ongoing growth in mobile.
Thanks.
Thank you and our next question comes from Colin Sebastian from Baird. Your line is now open.
Oh, Thanks, a couple from me as well.
First off as you embrace more commerce and payments on the platform broadly speaking.
Along with the new AD formats, you've talked about can you also talk about what role take rates might play in terms of future initiatives and revenue growth.
And then secondly on on the system and duplex in terms of near term search innovation I Wonder if you could characterize how important that is in terms of the momentum you're seeing in longer term, how this might impact a plot for monetization. Thank you.
You don't have the first question I think it's a good question. There's a lot of discovery that happens across oh across schools properties, and and including search and Youtube and so you know anything we can do to make sure uses have a better experience. When they are interested in transacting you know I will have a big growth. So there's a lot more work underway to make sure payments work better you know sign and works better payments works better and I. You know all of that I think will be you know over the long term will be drivers drivers you know because it improves the overall user experience, especially for commercial claims.
In terms of assistant than a duplex I mean, you know for US assistant is better we can clearly see we can really push our goal of being more helpful to use is helping them get things done, including things that you know Matt from the real World and you know and so that's what we are focused on you know and.
And if we get that right. You know you just like with search you know there are many things, which uses Wanna get done which do have a commercial.
We intend to them and you know and I think that's that's the value creation opportunity as well.
But you know, but we are focused on making sure the user experience.
You know constantly gets better and we are investing to get there.
Thank you and our next question comes from Justin Post from Bank of America Merrill Lynch. Your line is now open.
Great. Thank you Sundar, there's been a lot of regulatory news lately, especially from the D. J. Just wondering how you think about a more intense regulatory environment getting a lot of questions and wondering if you think about that really affecting Google operations, and then and then Ruth definitely nice acceleration across the board of course Europe .
Accelerated as well when you think about GDPR implementation last year and you are lapping that is that helping Europe at all or what or was there really no impact from GDPR. Thank you.
[noise] [noise] you know on the regulatory question Oh, you know question <unk> you know we understand you know that there will be scrutiny we are.
We will engage constructively, it's not a new to US we have a we have participated in these processes before today, we do operate under a lot of regulation a bead on privacy bead on competition be beat on copyright intellectual property.
It's a dry and.
And even in the U.S. you know we have engaged in the process before or to the extent you know we have time for questions. We will do so constructively and and to the extent that our concerns will will address them as well, but I think for for me. It's important that we stay focused on building health food products to users and you know that's the value. We ultimately provide a you know our our users and you know I think that's what we'll stay focused on as a company.
And in terms of GDPR, we did implement late in the second quarter of 2018.
You know we think.
It's it's obviously a critical area, making sure we get it right that said the overall impact of regulation on consumers and businesses. A you know it is still playing out and were very focused on making sure. We're doing what's best for users and ensuring we're compliant with a lot not based on any potential revenue impact.
Thank you.
Thank you and our final question comes from the line of Ross Sandler from Barclays. Your line is now open.
Great if I can squeeze two in real quick Ruth.
Yes, Google segment operating profit was up 16% of the highest growth rate in about two years. So I guess, how should we think about the cadence of that relative to your comments about head count growth and given a look or acquisition looking forward.
And then Sundar.
But I owe you mentioned that actors Android installed base is now over 2.5 billion.
A couple of about 10% year on year, and a lot of that coming from emerging markets. So I guess, just big picture, how do we think about the growth rates that you can sustain and mobile search revenue relative to that 10%.
Activating for a growth rate. Thank you.
Yeah. Thanks for that I tried to and Numerate those things as we're looking forward I'm very much to your question you know our overall long term investment thesis is unchanged. We are very focused on investing to support the ongoing growth we see across Google. It you know in particular as we're talking about in search while we're also investing to build new businesses, most notably in cloud as we've talked a lot about here today and across all of alphabet. We do continue to benefit from machine learning, that's both Opex and Capex and as we both commented given the opportunities we see a with the application of machine learning across the business, we are continuing to invest.
Our our lands on the pace of investing does have three facets in it <unk> first is investing at the appropriate pace to support long term earnings growth and.
And we were very focused second on optimizing investments within each product area and finally, as we've talked about investing to support operational excellence.
But the Mega point is that we are excited about the long term opportunity and we're continuing to invest which is why in opening comments I wanted to make sure to call out what were.
Seeing with respect to ongoing investments and across the business the increases in head count and the reasons for them at the benefits of those investments as well as sales and marketing and the fact that that is a back half loaded and a back half weighted I should say and so we tried to lay out the relevant points for you to ensure that we make it very clear we are.
Committed to continuing to invest for what we see as a long term opportunities.
And you know on the mobile question you know, we are definitely Mustang and Android with the focus on the next billion users I spoke to us.
Ah you know, making sure the mobile experience continues to evolve in terms of the mobile experience I still think you know from a use this time point, there's a lot of information overload, so being helpful to users and helping them navigate it b. So chose Huston mobs and and Youtube I think I think you know we are focused on the opportunities there.
And in terms of the next billion users you know there there's a lot of headroom that over time and be a focused on this is why we take it puts like Android go seamlessly how we're constantly working hard to lower the barrier. So that more people can benefit from being online and then participating and digital economy and so it will continue to be a focus for us.
Thank you and that concludes our question and answer session for today I'd like to turn the conference back over to Ellen West for closing remarks.
Thanks, everyone for joining us today, we look forward to speaking with you again on our third quarter call. Thank you and have a good afternoon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.
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