Q3 2022 Alphabet Inc Earnings Call
[music].
Yes.
A listen only mode. After the speaker presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one one on your telephone.
I would 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 2022 earnings Conference call.
With us today are Sundar Pichai Philipp Schindler en route threat.
Now I'll quickly cover the safe Harbor.
Some of the statements that we make today regarding our business operations and financial performance 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 SEC as updated in our Form 10-Q for the quarter ended September 32022 expected to be filed with the SEC later today.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at a B C D.
X Y Z forward Slash Investor and now I'll turn the call over to Sundar.
Thank you Jim and good afternoon, everyone. Our financial results for the third quarter reflect healthy fundamental growth in search and momentum in cloud.
Our reported results reflect the effect of foreign exchange the.
The growth in our advertising revenues was also impacted by lapping last year's elevated growth levels and the challenging macro climate.
We are sharpening our focus on a clear set of product and business priorities.
The product announcements, we have made in just the past month alone have shown that very clearly.
Including significant improvements to search powered by AI.
New ways to monetize Youtube shots, which will support the creator ecosystem.
A strong series of hardware launches and the new partnership and product announcements at cloud next.
These will all drive value for users partners and our business.
We've also started our work to drive efficiency by realigning resources to invest in our biggest growth opportunities.
Over the past quarter, we have made several shifts away from lower priority efforts to fuel higher growth priorities.
Our Q4 head count additions will be significantly lower than Q3.
And as we plan for 2023, we'll continue to make important trade offs, where needed and are focused on moderating operating expense growth.
Throughout Google's history pretty it's a dedicated focus have enabled us to emerge strongly and unleash new era of computing innovation.
For example over a decade ago, focusing the company's efforts on mobile helped us to build and grow our business for the shift to mobile computing.
We entered a similar point now with AI.
The transformational technology, our investments in AI and deep computer science means that we can deliver a wide range of breakthroughs.
Cross sell products and services to help people businesses and communities.
Turning to the quarter first our core information products.
Our search on event, we shared how we are using AI advances to deliver a more natural and intuitive search experience.
These advancements will soon helped to surface thinks you might find helpful. Before you've even finished typing.
We are also making visual search more natural than ever before.
People now use Google lens to answer more than 8 billion questions every month, using just a photo or an image.
Now we are supercharging, our visual search capabilities to help people find what they're looking for at businesses nearby.
Philip will also talk in more detail about our work to make it easier to shop on Google a key focus.
Google Lens also has an amazing translation feature.
You can now blend translated texts seamlessly into the background of the majors like menu. So street signs in just 100 milliseconds shorter than a blink of an eye.
Two advanced language models AI is unlocking new experiences that support more natural and conversational ways to interact with computing labs.
Lambda is one of our most promising models for this it's now available to demo and our AI test kitchen, which offers a way for people to experience and give feedback on emerging AI technology.
Deep mine also debate and it's most helpful and safest language model, yet sparrow can talk to users answer questions and provide evidence based answers using Google search.
Moving to Youtube on a big priority, we remain focused on long term growth for our community of users creators and advertisers to that end, we announced some exciting changes that are made on Youtube event last month.
First improving the monetization of shots there is a big deal for creators and for our business, we'll introduce revenue sharing on shots early next year.
This update makes Youtube the only platform, where creators can monetize their content across short long and life formats at scale.
Shots continues to show great user momentum.
And we continue to invest in our mobile video tools for creators we.
We are seeing mobile first creators investing more in the platform, creating content that helps the broader community growth.
TV is a big area for us as well Nielsen reported that Youtube is a leader in streaming TV viewership in the U S. In September for the first time.
Turning next to hardware hot.
Hardware is an important area of investment for US we are investing deeply from the silicon to the ores to powerful software experiences because it's a big opportunity to more computing forward and build deeper relationships with people, who love using Google products.
It also really helps to guide the Android ecosystem beyond just building the underlying platform.
Earlier this month, we introduced the pixel seven depicts a seven pro and the very first pixel watch. We've also previewed more detail about the pixel tablet, which is coming in 2023.
Pixel combines our foundational technologies.
AI Android Google tensor G. Two processor to bring state of the art AI directly to the device.
The pixel <unk> and pixel promo offer industry, leading photography features that can and blur or sharpen photos and shoots cinema quality videos.
We recently had our highest selling week ever for pixel and I'm really proud of the positive revenues so far.
Along with Great devices, we introduced our latest release of Android Android 13 offers new personalization features improved privacy controls and a more seamless experience with connected devices.
Next Google Cloud, we see continued momentum with Q3 revenue of $6 $9 billion with Google Cloud platform revenue growth rate above that brigade as long shed that cloud is a key priority for the company. The long term trends that are driving cloud adoption continue to play an even stronger role during uncertain.
Macro economic times.
Google Cloud helps customers solve today's business challenges.
<unk> productivity reduce costs and unlock new growth engines.
At cloud next we unveiled more than 100, new products and announced new and expanding relationships with Toyota Prudential plc, Coinbase and Apple event.
The shift to hybrid work continues with organizations evolving to support an increasingly distributed workforce.
Proud to share that Google Workspaces now used by more than 8 million businesses and organizations worldwide that includes Korean air as well as the U S Army, which is transitioning 250000 personnel to our secure communication and collaboration platform.
In the past year, we have announced nearly 300 new capabilities to support hybrid work.
Empowering a distributed workforce brings an increased need for cyber security.
Keep workers data and critical business systems safe and secure.
It's top of mind for nearly every CEO I speak with and customers, including the city of Los Angeles, Rosh and Bernard <unk> put their trust in Google clouds industry, leading products.
Our new Chronicle security Operation Suite Unified security analytics automation response and threat intelligence.
This has helped worthy of analyzed 22 times more security data, while cutting investigation time in half.
In September we closed our acquisition of <unk> and are proud to welcome more than 2600 colleagues to Google.
With <unk> industry, leading threat intelligence and incident response capabilities to help customers stay protected at every stage of the security lifecycle.
Customers partner with Google Cloud, because we offer a single platform that can analyze data across any cloud.
Our leadership here is winning customers across industries, including the state of Hawaii, and the Australia Securities Exchange.
Our capabilities help solve difficult business challenges like supply chain and logistics, while also creating new growth opportunities.
And as companies globally are looking to drive efficiencies, Google clouds open infrastructure creates a valuable pathway to reduce costs and modernize.
In addition, with our new media CDN product for large media streaming workloads, we are helping major league baseball and Paramount plus deliver flawless experiences to their customers.
And with Google Cloud edge Rite aid as more efficiently helping patients in their pharmacies.
Across all of these areas I'm proud of the trust and the enthusiasm our customers are placing in Google cloud.
Briefly on our other bets.
<unk> announced that Los Angeles will be its third ride hailing city, joining Phoenix and San Francisco.
Raimo, we'll begin by mapping several neighborhoods in L. A as it prepares to serve people there.
Wing, just surpassed 300000 commercial deliveries.
It's servicing new areas in Australia, and announced its first drone delivery trials in Ireland.
To close times like this are clarifying as we head into 2023, we're going to focus on our most important priorities as a company.
To support our growth will continue to invest responsibly for the long term innovation that is responsive to the current economic environment.
Wanted to tanker employees around the world for their contributions over the last quarter.
We help people our partners and society when we focus on what we do best and execute on that really well over to you Philip.
Thanks, Sundar and Hello, everyone, it's great to be joining you all today.
Google services revenues of 61 billion were up 2% year on year negatively affected by a sizable foreign exchange headwind.
Search and other revenues grew 4% year over year to 40 billion led by travel and retail.
Both Youtube ads and network and modest year over year revenue declines.
Other revenues were up 2% year over year with growth in Youtube non advertising and hardware revenues offset by a decrease in play revenues.
Play revenues were lower due to a number of factors <unk>.
Including a decline in user engagement in gaming from the elevated levels seen earlier in the pandemic.
Among other factors this shift in user behavior also created downward pressure on our advertising revenues with lower revenues from a promo spend on Youtube network and play ads and search and other.
100, a couple of other trends that affected our ads business in Q3, and Ruth will provide more detail.
On the second quarter earnings call. We noted a pullback in spend by some advertisers on Youtube network and these pullbacks in spend increased in the third quarter.
In search and other the largest factor in the deceleration in Q3 was loving the outsized performance in 2021.
In the third quarter, we did see a pullback in spend by some advertisers in certain areas and search ads.
For example in financial services, we saw a pullback in the insurance loan mortgage and crypto subcategories.
There's no question, we're operating in an uncertain environment and that business is big and small continued to get tested a new and different ways, depending on where they are in the world.
When it comes to how we're helping our focus remains unchanged the same AI driving breakthroughs in everything from protein folding flood forecasting and language understanding is also fueling innovation across our ads products via insights automation and easier to use advertising tools and formats, we're helping businesses stay agile.
<unk> build resilience anticipate the future and show up for customers and more connected visual and consistent ways.
We're helping them understand demand deal with inventory challenges increased loyalty and much more.
In challenging times like these advertisers are carefully evaluating the effectiveness of their budgets.
Search tends to do relatively well in such an environment given its strong measure ability and focus on delivering ROI. It's all.
So well suited to quickly adjust to changes in consumer behavior, and when searches coupled with our automation products across bidding creative targeting or performance Max It can drive performance even further.
Let's talk retail an important vertical for us.
No matter, where shoppers are buying whether it's in store online or both we have the solutions to help them deliver results wherever their customers are.
Take online fashion retailer revolve, who use its global Influencer network, along with our category insights and automated tools to acquire new customers at lower cost.
Our festivals and events returned to summer revolve used lower funnel solutions across search and shopping to engage with consumers in high demand apparel categories, helping across $1 billion in trailing 12 months net sales for the first time.
And then there's magazine Luisa a large Brazilian retailer, who embraced omnichannel by measuring and bidding directly to store sales come.
Coupled with in store pickup of notation CIP Max magazine, Luiza drove a 38% ROE as over 30 days and has since expanded this strategy to all eligible products, including $8 million plus new offers.
And with our shoppers know exactly what they're looking for or just seeking inspiration, we're innovating to make it easier and more engaging for people to shop online across our surfaces.
From finding the best deals across all types of merchants, including 200 million plus available daily deals in Q3 to.
To new ways to search when you type shop, followed by whatever item you are looking for you will unlock a visual content stream of ideas that feel just like window shopping but online.
And then there's Youtube not only can you use us no buy more products and videos, but shopping as entertainment experiences, bringing the magic of our creators to the shopping experience.
Like in September when Carly interest General hosted an exclusive shopping stream event to celebrate the debut of our new Chris collection for Kylie cosmetics.
And at Adweek last week, not only did we announced that product feeds are coming to discovery, but they've creatives will soon be able to take products from brands across the video shorts and live streams.
This means viewers can shop products seamlessly, while they watch their favorite content, while merchants can drive incremental reach and engagement for free listing offers when tech by creators that viewers love and trust.
I already touched on youtube's performance in the quarter, let's deep dive into what we're focused on.
First we're helping advertisers understand how they can drive effectiveness with every campaign they run on Youtube.
Full funnel is a key way to do this.
Buying Youtube across consideration awareness and action allows marketers to meet customers at different stages in their purchasing journey, which we know are increasingly complex, while delivering towards our key business goals.
Creative and media worked together across the funnel to create new demand and convert current demand.
Casselberry, Singapore, a furniture retailer activated a full funnel approach as part of its U S expansion.
It used brand and action formats indentified, its most relevant audiences and build a robust measurement framework to boost sales and awareness.
<unk>, a 65% increase in U S brand searches.
<unk> is using the same strategy for the upcoming holiday season.
Two other areas, where we're continuing to invest.
Connected TV and Schwartz.
First on CTV eyeballs keep moving away from traditional television on average global viewers are watching 700 million plus hours of Youtube content on TV daily.
And according to Nielsen during the 2021 2022 U S broadcast seasons Youtube reached more viewers during primetime on CTV than any linear television network.
Brands continue to take notice.
Like instant card, who tapped into CTV to maximize its television screen strategy for its the World is your card brand campaign featuring lithium.
It drove breakout searches for its product and above average Brent lift across awareness consideration and purchase intent and it also engaged a significant increase in audience on top of TV with 66% lower CPM.
And then Theres shorts.
1.5 billion users every month 30 billion daily views.
Engagement is strong we've always said that we focus on building great user and creator experience. This first and then followed that with monetization over time.
As of September .
Ads on shorts have officially launched we have video action App and performance Mexican pains.
As Linda mentioned, we also extended the Youtube partner program and announced a revenue sharing model for shorts creators. The first of its kind for short form content.
It's early but we're encouraged by the progress we've made this year insurance monetization and support for sustaining the creator ecosystem.
I'll close with something I said before and I think it's worth reiterating our success is only possible when our customers and partners succeed whether it's helping individual Youtube creators or play developers make a living and build thriving businesses or bringing the best across Google to our partners our focus on driving growth for our partners.
And key ecosystems remains steadfast.
I'm proud that over the past three years, we've paid creators artists and media companies over $50 billion.
In terms of how we're helping our partners innovate I'll share two highlights first.
First a transformative partnership with trenching the number one OEM in Africa, and Pakistan will help us close the digital divide by doubling annual Activations by 2025 and build healthful products for the next billion users.
And then in Commerce with FEMSA digital in Mexico, we're bringing together solutions across adds cloud maps ways and beyond to bolster its data analytics capabilities. So it can better reach and retain its beverage and retail customers.
On behalf of many a massive thank you to our customers and partners for their collaboration trust and feedback and another massive thank you to our sales partnerships product engineering and support teams the hard work dedication and ingenuity of Cougars, especially during more challenging times is truly second to none.
On that note over to Europe .
Thank you Philip.
Actual results for the third quarter reflect healthy fundamental growth in search and momentum in cloud I reported results clearly reflect the effect of foreign exchange my comments will be on year over year comparisons for the third quarter unless I state otherwise I will start with the results at the alphabet level, followed by segment results and conclude with our outlook.
For the third quarter, our consolidated revenues were $69 1 billion up 6% or up 11% in constant currency.
Our total cost of revenues was $31 2 billion up 13%, primarily driven by other cost of revenues, which was $19 3 billion up 20% the.
The biggest factor here with costs associated with data centers and other operations followed by hardware costs.
Operating expenses were $20 8 billion up 26%, reflecting the following first the increases in R&D and G&A expenses, which were driven primarily by head count growth and second the growth in sales and marketing expenses, which was driven primarily by increased spending on.
Ads and promotions followed by head count growth.
Operating income was $17 1 billion down 19% versus last year, and our operating margin was 25%.
Other income and expense was a loss of 902 million net income was $13 9 billion, we delivered free cash flow of $16 1 billion in the quarter and 63 billion for the trailing 12 months, we ended the quarter with 116 billion in cash and marketable.
Securities.
Let me now turn to our segment financial results as a reminder, we provide fixed foreign exchange revenues only at the consolidated level and by geographic region.
<unk> segment revenues are reported on a GAAP basis.
Starting with our Google Services segment total Google services revenues were $61 4 billion up 2%.
Across our advertising revenues the year over year deceleration in growth rates versus the third quarter of last year with a largely driven by lapping very strong performance, most notably in search and other revenues. Additionally.
Additionally, the year on year deceleration on Youtube and network reflects a pullback in spend by some advertisers as we first noted last quarter.
In terms of the revenue lines, Google search and other advertising revenues of $39 5 billion in the quarter were up 4% Youtube advertising revenues of $7 1 billion were down 2% network advertising revenues of $7 9 billion were down 2%.
Other revenues were $6 9 billion up 2%, reflecting several factors.
Subscriber growth in Youtube music premium and Youtube TV continued to drive ongoing strong growth in Youtube non advertising revenues.
We delivered solid growth in hardware revenues, primarily from sales of the pixel <unk>.
Finally, the growth in these two areas was offset by a year on year decline in play revenues, reflecting a slowdown in buyer spend due to a number of factors, including lower engagement levels in gaming compared with earlier stages of the pandemic.
In terms of costs within Google services tack with $11 8 billion up 3% Google services operating income was $19 8 billion down 17% and the operating margin was 32%.
Turning to the Google Cloud segment revenues were $6 9 billion for the second quarter up 38%.
<unk> revenue growth was again greater than clouds, reflecting significant growth in both infrastructure and platform services.
Strong revenue growth in Google Workspace was driven by growth in both seats and average revenue per seat.
<unk> cloud had an operating loss of $699 million.
As to our other bets for the third quarter revenues were $209 million and the operating loss was $1 6 billion.
Let me close with some comments on our outlook.
Our results in the third quarter, reflecting increased headwind from foreign exchange given the ongoing strengthening of the U S dollar versus last year.
Excluding the revenue benefit from hedging there was a six point headwind year on year or five points with the hedge benefit compared with a slight tailwind in the third quarter of 2021.
Looking to the fourth quarter based on strengthening of the U S dollar quarter to date, we expect an even larger headwind from foreign exchange. In addition, as we have previously said the impact of foreign exchange is greater on operating income than it is on revenues given that our expense base is weighted more towards the <unk>.
With most of our R&D efforts located here.
Turning to our segment results within the Google Services segment search and other revenues had healthy fundamental growth in the third quarter, which was affected by the impact of currency movements.
I already noted the largest driver of the deceleration in year on year growth at search compared with <unk> 21 was lapping the outsize growth in 2021.
The sequential deceleration in the year on year growth of search in the third quarter versus the second quarter was also driven by lapping with an additional headwind from pullback and advertiser spend in some areas.
And Youtube and network.
<unk> deceleration of year on year growth in the third quarter versus the second quarter, primarily reflects further pullbacks in advertiser spend.
In the fourth quarter, the very strong revenue performance last year, we will continue to create tough comps that will weigh on the year on year growth rate of advertising revenues.
Within other revenues, we expect an ongoing headwind from the slowdown in buyers spent on Google play due to a number of factors, including lower levels of user engagement and gaming that impacted results in the second and third quarters.
As Philip mentioned among other factors. This shift in user behavior was also a headwind to advertising revenues with lower revenues from App promo spend on Youtube network and play ads and search and other.
Turning to Google cloud, our results reflect momentum across TCP and workspace customers.
Customers globally are adopting our products and services to digitally transform their businesses. We are excited about the opportunity given that businesses and governments are still in the early days of public cloud adoption and we continue to invest accordingly, we remain focused on the longer term path to <unk>.
<unk> ability.
In terms of profitability, we have an effort underway to ensure we redeploy investments against our most compelling opportunities as we noted on our second quarter call our actions to slow the pace of hiring will become more apparent in 2023.
With respect to alphabet head count we added 12765 people in the third quarter, including more than 2600 of those joining Google cloud as part of our acquisition of <unk>.
As in prior quarters, the majority of hires or for technical roles in the fourth quarter, We expect head count additions will slow to less than half the number added in Q3.
Within this slower head count growth next year, we will continue hiring for critical roles.
Particularly focused on top engineering and technical talent.
Turning to Capex, we continue to make significant investments in technical infrastructure with servers as the largest component.
Thank you Sundar, Philip and I will now take your questions.
As a reminder to ask a question you will need to press star one to one on your telephone.
Prevent any background noise, we ask that you. Please mute your line once your question. It has been stated.
Our first question comes from the line of Eric Sheridan of Goldman Sachs. Your question. Please thanks very much maybe two questions. If I can so first you know I think what investors are very curious about is how much this change in terms of aligning and.
And it gets your priorities as a reflection of what you expect to happen over the next six to 12 months in the broader macro environment versus a longer term perspective of baby maximizing for productivity and efficiency, we'd love to get your philosophy on that and then.
Still a lot of comments in there about Youtube and the potential for growth going forward can you go a little bit deeper on what you're seeing in terms of both the opportunity set to drive revenue and turn up a possible headwind into a tailwind with respect to shorts and connected TV over the medium to long term. Thanks, so much.
Thanks look I would say its a combination obviously as a company over time, we've had a pretty extraordinary growth and then there are.
Pretty it's fair I viewed it as a moment, where you take the time.
To optimize the company to make sure we are set up for the next decade of growth ahead.
Our view this is one of those moments it gives us a chance to make sure. We are with clarity identifying what are the most important areas and making sure we are directing our incremental investments.
Towards dose and that's with us where we can realign so I view this as an opportunity to do that and also.
Being responsive.
To the current macro environment, we are seeing.
Yeah.
Yes, and from my side, Eric in the third quarter as I mentioned, there was a further pullback in spend by some advertisers across both brand and direct response, but overall I feel Youtube remains in a really good position to continue to benefit from the streaming boom in direct response, we think theres a lot of room.
To run to make really Youtube more shopper boom or actionable from video action campaigns to product feeds app campaigns life Commerce futures advertisers are turning to Youtube to convert intent into action and really drive performance at scale.
Product feeds are coming to discovery ads soon and recent expenditure shorts were already seeing results.
And in fact on average video action campaigns with product feed so and over 70% increase in conversions on <unk> versus those without.
On the brand side as I said earlier eyeballs are moving away from linear TV and we're helping brands move beyond tradition, no, let's do efficiently really achieved their reach and awareness goals and obviously, you mentioned that as well connected Tvs and important part of the strategy when.
When you think about it is really the best place for advertisers to reach new consumers across multiple formats and screens from short to long form podcast music all the way to CTV.
Thank you.
Our next question comes from Brian Nowak of Morgan Stanley . Your question, Please Brian Nowak.
Thanks for taking my questions I have two the first one that for for Sunday, Our Ruth Sundar just to go back to the comment about earlier in the quarter, becoming 20% more efficient at that Tonight. Your comment on investing responsibly over the long term of being responsive to the environment is helpful. But if I look at sort of the excel sheet I think youll have added about 51000, new people to the company since it.
Start of last year.
Can you give us some examples of internal Kpis are quantifiable analysis, you're running just to ensure you're generating ROI for investors from all your hiring as you sort of run through these analyses. That's the first one and the second one Philip just I'm shorts are you seeing short lead to it.
Mental time spent from those users or is it more so youre seeing the time shift from other forms of Youtube over too short.
Brian and I think.
Look I think we gave.
Some they've been clear that we are in a moderate our pace of hiring going into 'twenty into Q4 as with <unk>.
2023.
I think.
We are.
No.
Seeing a lot of opportunities across a whole set of areas and every time.
Talent is the most precious resource. So we are constantly working to make sure everyone. We've brought in.
You know as is working on the most important things as a company and particularly so and that's a lot of what sharpening our focus has been about.
We are reviewing.
<unk>.
You know at all scales pretty granularly to make sure.
We have the right plans, there and based on that the right Resourcing and making course corrections and this will be an ongoing thing.
It is something we will continue doing going into 'twenty three as well.
Yes into the second part of the question as we discussed before we've always focused on building a great user and creator experience first followed by increasing monetization over time.
We continue to experience a slight headwind to revenues as shorts viewership grew as a percentage of total Youtube watch time and.
As I alluded to earlier the initial progress on insurance monetization has been encouraging and we're focused on closing the monetization gap between short and long form content on Youtube overtime and more specifically consumers are increasingly increasingly consuming short form video and we're seeing this across multiple platforms, including.
Youtube and as I said earlier shorts are being watched by one 5 billion plus logged in users every month.
Great. Thank you both.
Thank you.
Our next question comes from the line of Doug Anmuth of Jpmorgan. Your question. Please Doug Anmuth.
Thanks for taking the question.
Bruce you highlighted momentum in cloud and growth accelerated in <unk> are you seeing any changes in cloud demand as existing or potential customers, perhaps rethink their priorities and then how should we think about the pace of investments at cloud going forward do you still believe that you are in more catch up mode or should we expect more state.
<unk> rate of investment and greater profit improvement. Thanks.
Thanks for the question, Yes, we are pleased with the ongoing momentum.
Across a wide range of.
Industries, and geographies and that really comes back to.
The team's focus on helping them solve unique business issues and innovate in new areas as they digitally transform.
Thank you.
More to your question and we talked about this last quarter in some cases certain customers are taking longer to decide and some have committed to deals with shorter terms or smaller deal sizes.
Yeah, which which we attribute to the more challenging macro environment. Some are impacted due to reasons that are specific to their business, but overall as you can see from the results here again we're.
We're pleased with the momentum in cloud and do continue to be excited about the long term opportunity. So that's why I made the comment in it.
That we do continue to.
That's meaningfully in this business, we are still focused very much so on the path to profitability and free cash flow strength here.
But we are continuing to invest in the business and it fits within the centers overall comments.
As we're looking at and we prioritize and they're certainly making sure they're focused on every element within their business, but fundamentally to the heart of your question, we're continuing to invest here.
Thank you.
Thank you.
Our next question comes from the line.
Michael Nathan.
Nathan.
Your line is open Michael makes sense.
Okay. Thanks, Sundar I wanted to you and they wanted to.
Glad to hear that he'd talk but not as it relates to Youtube more about search.
It looks like yogurt confirms are spending more time on $6 13.
Product recommendations and by mixing learning if you've seen any changes in your search behavior by demographics at Google.
Thanks George.
Visual less tech space.
Forward in order to maintain more relevant to younger users. So that's one and then Ruth can you just dig in a bit.
On the Opex growth in Google services, you called out other cost of revenues being up 20% it looks like as a percentage of revenues.
All time high I could talk a bit about how much of that cost base is fixed versus variable and anything on the outlook.
It's driving.
Despite this quarter and maybe what you expect going forward there will be cost revenue. Thanks.
Yeah.
Okay, I think it's always important that be China understand our user segments and their needs. So that we can make sure. The products are helpful in working for them.
We are so as connect thousands of studies a year to understand how user needs are evolving.
And as part of it.
There are some studies, which obviously show people, particularly younger users in.
Certain categories, maybe fashion inspiration as an example look for more visual ways to engage and so these are all learnings we are constantly taking in and we use it to improve search and if you saw search on.
We had many many explorations than product directions, which which which move in that direction. So I think it's a healthy way of.
Iterating and innovating to build the best products and services for our users.
And then in terms of your question regarding margins.
Two parts really on other cost of revenues the biggest driver of the year on year increase in other cost of revenues does continue to be data centers and other operations.
Change really here this quarter in Q3, the second largest driver was hardware and then CAC moved from its usual number two spot down to number three and there were really two key factors for the change in the rank order between hardware and CAC.
Probably pretty self evident just spell them out the year on year decline in Youtube ads revenues, obviously muted the growth in CAC and then the growth the pixel phone sales due primarily to the launch of pixel <unk> drove that shift what we're looking at overall sort of to your broader question about profitability and Google services.
Overall pace of investments and how we're looking at.
With the change mix change and ongoing opportunities to drive revenue growth and how it flows through all the way to Op, Inc growth and so to centers opening comments and as we've been talking about.
Some of the margin upside last year was due to timing issues with the very strong growth of revenues and there was a lag in investments.
What we're focused on here is how do we continue to manage on a go forward basis to deliver durable long term results.
Thank you.
Thank you our next question.
Come from the line of Ross Sandler of Barclays. Your question. Please Ross Sandler.
Hey, guys.
Beat the dead horse on the Google services margin.
But you just mentioned mix shift I think that's a lot of what's going on here and given the trajectory that you see in search and in play, which we estimate are where most of the profits coming from that segment.
Some of those lower margin items Youtube subscription hardware et cetera.
Maybe you could help frame. The next like couple of years it is going to land.
Hello.
Which I think was around where we are here at 32% could we see the <unk>.
Q 'twenty rose, 27% renewals there was not any help just framing where that might land would be helpful. Thank you.
Well as I'm sure you would expect to leave the modeling to you, but there are two elements of it and I think a center and fill up really talked about the first part which is the ongoing opportunity we see with search with you too with some of the actions that we're taking the opportunity with AI applied to both the opportunities as we continue to.
Built out monetization on Youtube shorts in particular, so we're continuing to focus on both the numerator you know they the driver here revenue as well as the.
The investments that we're making and want to make sure to centers comments about sharpening our focus that we are economizing utilizing resources as effectively as possible. So it is both it is both the efforts we're taking around expense management and building four durable performance.
<unk> as well as the efforts, we're taking which are in the investment line, but drive topline performance I would say, we also contextualize that I tried to do that.
In response to Michael's questions and we said this last year. We've noted it that some of the margin upside last year. It was due to timing issues and we had a very strong growth in revenues a surge in revenues and a lag in investments that we said was a timing difference and you are seeing some of that here, but to the may.
10 point, we're looking at both what we can do to continue to support long term revenue growth, but while doing so being mindful of the pace of investment I'll leave the modeling to you.
Thank you.
Our next question.
Comes from Brent Thill of Jefferies. Your line is open Brent Thill.
On the pullback by some advertisers is there a common thread that you can you can draw in common.
Underlying characteristics that are pulling back versus those that are continuing to lean forward can you talk about that dynamic and what you're seeing.
Why don't I start and I'll pass it to sell it for a bit more color potentially.
I wanted to make sure that one of the comments that we made in the opening comments was what's very clear, which is the your ear on your story and ads was really lapping the very strong third quarter and so to get to your question. You are really talking about sequential decline on year on year growth and I think what's notable.
In search we had really healthy growth in Q3, excluding the impact of foreign exchange the sequential deceleration in search in the third quarter versus the second quarter was again, primarily driven by lapping and just I wanted to make sure that that was clear there was.
Some pullback from advertisers spend in some areas have noted that in opening comments, and then and Youtube and network the sequential deceleration.
Of year on year growth in both the second quarter.
Third quarter versus the second quarter. It was really further pullbacks and advertiser spend.
That's exactly right and as I said earlier in search and other ads revenues.
While lapping the outsized performance was the largest sector in Q3, we did see some advertisers pulled back in certain areas and search ads and I think the example, I called out was in financial services.
In the areas of insurance loan mortgage crypto subcategories.
And we also noted a pullback in spend by some advertisers on Youtube network and.
These pullbacks in spend increased in the third quarter and we also noted lower revenues from a promo spend on Youtube and network.
Thank you.
Our next question.
Come from Mark Mahaney of Evercore ISI. Please go ahead Mark Mahaney.
Apologies.
We'll need to go.
The next question.
They come from Maria rips.
Maria <unk> of Canaccord Your line is open.
Yes.
Please standby.
Turning to see if there are technical difficulties. Thank you all and if the operator can keep us posted here, maybe even true ma'am, yes. Thank you. Thank you so much for your patience again, our next.
Question comes from Mark Mahaney of Evercore ISI Mark Mahaney. Okay. Go ahead, just checking can you hear me.
Thank you.
Hello, We can hear you Mike Thank you great. Thanks.
Thanks, Ruth Okay. Two questions. Please one sundar you've been with the company for a long time, you've seen these cycles before can you put any context as to the.
As economic conditions wax and wane the impact that has on Google like how does this environment look to you versus prior cycles that the company has managed to and then Ruth on the cost side.
I understand the comments, we understand the comments about the head count adds and what you plan to do in the fourth quarter, but could you talk about non head count related costs and the opportunity you see or the need that you see for managing goes down do you see that there are significant opportunities to do that as well so again non head count costs.
Thank you very much.
Thanks Mark.
A couple of things.
I think.
Compared to the past I think going through this I mean, there is as we have said before.
There is more uncertainty DSV go through we definitely see indicators on both sides. So that makes it.
It makes it a bit more unique.
Number two I would say the strength of search.
With this the product for users as well as for advertisers in terms of delivering ROI to a tough time in the AD market I think I think.
Is it is great to see.
Third just like it when we went through it last time.
It ahead of US was a decade of mobile and the opportunities. It brought to me sitting now looking at.
All the work that's going on in AI, we've been an AI first company for the past.
Seven years, and all the investments and it looks like a big opportunity ahead, so keeping all that in mind focused on the long term using this moment to be disciplined and prioritize and focus I think will set us up well for the next decade ahead.
And then in terms of your second question, Yes, I think the CT centers comment is with the rapid pace of growth that we've experienced we see opportunities to focus more and that drives the opportunities to redeploy amazing talent, we have and to the highest priority efforts that we have and to the U S.
Active and efficient.
As possible there are obviously not to your question non payroll associated expenses that also then attach and so well you know in the operating environment like this adds urgency to prioritization and we want to make sure we're using our resources as effectively and efficiently as possible at the same time.
As we've tried to be very clear there are very exciting areas that we will continue to invest in and so part of this is resource optimization constrained optimization. However, you want to describe it we wanted to free up where we can to ensure we have capacity to invest as needed and opportunities that deliver these durable long term results that we've talked about.
So we're trying to be.
Smart about.
We are redeploying, where we can finding efficiencies, where we can while still investing for long term growth.
Thank you Ruth Thank you Sundar.
Thank you our next question.
Come from the line of Maria reps.
Of Canaccord.
Your line is open.
Great. Thanks, so much for taking my questions.
First you talked about strength in retail and travel can you maybe talk about automotive advertising and whether you're seeing any signs of recovery of supply has been normalizing and if so how much this rebound sort of compared to prior cycles.
And then secondly, just on performance Max It sounds like it continues to do pretty well here. So based on your conversations with advertisers are there any specific features or functionality.
That you would call out a significant drivers of the product attractiveness and are there any color is there any color you can add maybe around relative ROI of Pemex.
Yes so.
There's really no additional color. Thank you very much for your question, but Theres really no additional color on other verticals apart from the ones I mentioned already.
I think we should share here at this moment on.
On the performance.
Mac side, which we touched on earlier and in prior quarters.
As a reminder, its our fully automated Google ads campaign type.
With the most general and inventory coverage.
It really helps advertisers deliver a better.
And we've been listening to feedback from advertisers and that have continued to roll out more features since its initial launch.
To increase transparency and help advertisers steer the automation more effectively and they're more future updates.
In July we launched a number of new settings, including she's nosy setting that's marketers make cui.
A typical adjustments for seasonal campaign bidding and.
And then optimization scores setting that Gibson indicator for performance improvement and gives you recommendations for better results. So all in all we're excited about what's ahead for P. Max further simplification of our products in general and frankly, the value we can keep driving for businesses of all sizes and especially when they needed most.
Great. Thanks, so much for the color.
Thank you our next question comes from.
Justin Post bank.
Bank of America, Justin Post your lines, great. Thanks, I guess I'll follow up about artificial intelligence first capex is up 31% year over year can you talk about a little bit what's driving that and can that be pulled back a bit is that cloud or really building out the AI capabilities and then maybe sundar as you think about <unk>.
Where it is today and you have much better visibility on AI capabilities and we do.
How could some of those capabilities.
<unk>.
Mixed into search and when would we as investors maybe see some of those benefits. Thank you.
Thanks, Justin look I mean, I think on the AI friends.
We are we.
We are still in very early innings.
Been very good about.
As as our research teams are making progress, bringing it into search so pretty much.
Former based models, including Burton Mama in search now so.
It's driven a massive improvement in search quality.
And helped us extend our lead in quality or.
Other products.
We are definitely using it to make it multi modal and I think going back to some of the earlier questions about making sure searches visual things like Google lens, bringing visual search into.
Being able to point to your phone it things and ask questions all of that really helps set up search well.
For the future of computing is headed.
AI not only affects search it affects all our products. It makes you to better ads better and through cloud, we are bringing it to other companies as well so we'll keep that in mind and maybe too.
So we'll keep that in mind. Thanks.
Yeah.
And then maybe Ruth on the Capex.
Whereas most of that going to and how do you think about that going forward.
The majority of Capex does continue to be for our technical infrastructure and as we've talked about on prior calls servers really has been the largest driver of the investment dollars.
The technical infrastructure team has consistently focused on levers to improve utilization and efficiency and they'll continue to do so we are investing to <unk> comments.
And building out that competes in support of all that we're doing with our AI teams and are excited about that and you know obviously you had seen some more activity earlier in the year regarding real estate, we feel good about where we are we're continuing to fit.
Fit out our offices et cetera for utilization.
And this new return to hybrid work environment that we're trying to make sure that we're doing that at a appropriate measured pace and that's really it.
You very much.
Thank you Ruth Thank you Sundar.
Thank you that concludes our Q&A session I'd like to turn the conference back to Jim Friedland for closing remarks.
Thanks, everyone for joining us today, we look forward to speaking with you again on our fourth quarter 2022 call. Thank you and have a good evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
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