Q4 2022 Alphabet Inc Earnings Call
Welcome everyone. Thank you for standing by for the alphabet fourth quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the 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 <unk> fourth quarter 2022 earnings conference call with US today are Sundar Pichai Philipp Schindler Rick correct.
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 forms 10-K, and 10-Q filed with the SEC, including our upcoming Form 10-K filing for the year ended December 31 2022.
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 ABC Dot X Y Z forward Slash investor.
Comments will be on year over year comparisons unless we state otherwise and now I'll turn the call over to Sundar.
Thank you Jim and good afternoon, everyone.
It is clear that after a pretty significant acceleration in digital spending during the pandemic.
The macroeconomic climate has become more challenging.
We continued to have an extraordinary business and prolonged immensely valuable services for people and our partners.
For example, during the World Cup final on December 18th Google search saw its highest quality per second volume.
At a time.
And beyond our advertising business, we have strong momentum in cloud.
Youtube subscriptions and on there.
However, our revenues this quarter impacted by pullbacks in advertiser spend and the impact of foreign exchange.
I'll focus on two major things today in a bit more detail and then I'll give a shorter than usual quarterly snapshot from across our business.
First how do we unlock the incredible opportunity enables for consumers our partners and for our business.
And second how we focus our investments and make necessary positions as a company to get there.
Hello.
The opportunity ahead.
AI is the most profound technology, we are working on to D. R.
Our talented researchers infrastructure and technology make us extremely well positioned S. AI reaches an inflection point.
More than six years ago, I first spoke about Google being an AI first company.
Since then we've been a leader in developing AI.
In fact, our Transformers research project.
And our feet in defining paper in 2017 as.
So that's our path breaking work and diffusion models are now debating many of the generating the AI applications.
Starting to see today.
Translating these kinds of technical leads into products that help billions of people is what our company has always tradeoffs.
Everyone working on the various projects centrally is excited.
We will pursue this.
But with a deep sense of responsibility.
Our AI principles.
And the highest standards of information integrity at the core of fall out of work.
We have been preparing for this moment since early last year.
And you're going to see a lot from us in the coming few months across three big areas of opportunity.
First large models.
This extensively about Lambda and Paul the industry's largest most sophisticated model.
Extensive work in deepwater.
In the coming weeks and months will make these language models available starting with Atlanta.
So that people can engage directly with them.
This will help us continue to get feedback.
And safely improve them.
These models are particularly amazing for composing constructing and summarizing.
They will become even more useful for people as they provide up to date more factual information.
And in search language models like Bergen Mum have improved searches for four years now.
Enabling significant ranking improvements and multimodal search like Google nets.
So when people will be able to interact directly with our newest most.
Most powerful language models as a companion to search and experiment and innovative base stay tune.
Second we will provide new tools and Apis for developers creators and partners.
This will empower them to innovate and build their own applications.
And discover new possibilities with AI on top of our language multi modal and other AI models.
However, our AI is a powerful enabler for businesses and organizations of all sizes and we have much more to come here.
Theres a few flavors of this.
Cloud is making our technological leadership in AI available to customers via our cloud AI platform.
Including infrastructure and tools for developers and data scientists like vertex AI.
We also offer specific AI solutions for sectors like manufacturing.
<unk> Sciences, and retail and we will continue to rollout more.
Workspace users benefit from AI powered features like smart canvas for collaboration.
And smart campus for creation.
And we are working to bring large language models to Gmail docs.
We will also make available other helpful generative capabilities from quality design and more.
And for our advertising partners Philip will discuss in detail, how AI is powering dramatic campaign improvements and.
And value, adding features part of that.
Of course in addition to all this AI also continues to improve google's other products dramatically.
And we will continue our work with others outside Google, including joint research collaborations to develop AI responsibly.
Apply AI to tackle society's greatest challenges and opportunities.
For example, deep mines protein database of all $200 million proteins known designs.
Now being used by $1 million biologist around the world.
We continue to invest in AI across the board and Google AI and deep mine are integral to our bright AI first future.
Over the past few years deep brain has been increasingly working across groups within Google and other bets.
That progress will be making a financial reporting change that drift will share more about in our comments.
We are just at the beginning of our AI journey and the best is yet to come.
The second thing I wanted to discuss is our sharpened focus.
We are committed to investing responsibly with great discipline and defining area. So that we can operate more cost effectively.
We are focused on methodically building financially sustainable vibrant growing businesses across alphabet.
For example, we are working to improve the economics and hardware as we focus more intently on the pixel line and our overall cost structure there.
Cloud remains very focused on its path to profitability.
And there are many opportunities to build on our progress at Youtube over the years, starting the charts monetization.
Overall I see this as an important journey to reengineer the company's cost base.
Okay.
There are several dimensions already underway, including <unk>.
<unk> of our product investments across Google and other bets.
It also includes our careful focus on our hiring needs, reflecting these priorities.
As well as efficiencies in our technical infrastructure and productivity improvements from our AI tools.
As part of this we did a rigorous review across product areas and functions.
Ensure that our people and roles are aligned with our highest priorities as a company.
And we announced a reduction in our workforce.
I'm grateful to the group is leaving us for all of their contributions and their hard work to help people and businesses every day.
Let me give a few quick updates from across the business this quarter.
Just this week, we started bringing revenue sharing to Youtube shops, which is now averaging over 50 billion Adv.
Up from the $30 billion I announced on the Q1 2022 call.
This will reward creators and help improve the shots experience for everyone.
Our subscription business continues to grow.
But Youtube music and premium surpassing 80 million subscribers, including <unk>.
Together with Youtube Primetime channel subscriptions and Youtube TV do you have good momentum here.
Youtube's NFL Sunday ticket will accelerate that by helping to drive subscriptions, bringing.
Bring new viewers to Youtube paid AD supported experiences and create new opportunities for creators.
Turning to our better many outlets and reviewers named <unk> hundred seven pro the phone of the year.
We just like Magic Eraser and photo.
Incredible.
Help differentiate us from others.
2022, 6770, <unk> are the best selling generation of phones, we have ever launched.
And we gained share in every market we operate in this year.
Next Google cloud.
<unk> continued momentum with Q4 revenue growing 32%.
Our differentiated products and focused go to market strategy continuing to drive customer momentum.
Beginning with real time data and analytics and AI.
Customers are increasingly choosing big liquidity, because the unified data lakes.
Our houses and advanced AI ml into one system.
Now analyze over 110 terabytes of data per segment.
Customers like Kroger and analyze data in multiple clouds without growing data in most cases.
Ci processes unstructured and structured data at scale.
In infrastructure, our global network advanced Gpus for AI supercomputer has snapped triple the throughput for its business critical AD ranking workload.
While significantly lowering cost.
Our machine learning infrastructure, the cloud <unk> for parts can run large scale training workloads up to 80% faster and alternatives. According to third party benchmarks.
We're just helping customers like Bayer accelerate drug discovery.
Our reliability advantages and open edge cloud power the mission critical hygienic worth of Telefonica, Germany.
As I mentioned, our suite of AI solutions across verticals are a key differentiator.
We help wells Fargo automate the customer service experience for mobile users.
In Hep C continually improve the quality of patient care.
In 2022, <unk>, which we are now integrating health or 1800 customers prepared for all that color from the most critical cyber security incidents.
In workspace innovations mentioned earlier are helping drive new wins.
And expansions across geographies.
In other bets from Calico debatable, we are focused on investing sustainably across the portfolio and creating good businesses.
Rarely for example has recently owned its strategy and structure to more clearly focus its product development.
To close we had all standing on the cusp of <unk>.
Amazing opportunities, we are going to be both responsible and focused as we move into <unk>.
A healthy disregard for the impossible has been core to our company culture from the very beginning.
When I look around Google today, I see that same spirit and energy driving our efforts.
Thanks to our employees our partners and people every bird who use our services.
I'm excited for what's next what would be useful.
Thanks, Sundar Hello, everyone. It's good to be with you all.
I'll start today with our Google services performance in the fourth quarter, and then dive deeper into our priority areas Google.
Google services revenues of 68 billion were down 2% year on year negatively affected by sizable foreign exchange headwind in Google advertising search and other revenues were down 2% year over year and Youtube ads in network had high single digit revenue declines.
Google other revenues were up 8% year over year with strong growth in Youtube non advertising and hardware revenues offset by decrease in play revenues.
I'll highlight two other factors that affected our ads business in Q4, Ruth will provide more detail.
Search and other revenues grew moderately year over year, excluding the impact of FX, reflecting an increase in retail and travel offset partially by decline in finance.
At the same time, we saw further pullback in spend by some advertisers in search in Q4 versus Q3.
And Youtube network the year over year revenue declines were due to a broadening of pullbacks in advertising spend in the fourth quarter.
I'll now zoom out to share more broadly, where we're investing and see clear opportunities for long term growth.
First Google AI, it's important to recognize that our advertising business has obviously benefited over the past decade from the transition to mobile and.
More recently, we had outsized growth in advertising revenues during the pandemic with 2022 advertising revenues 90 billion higher than in 2019.
Going forward, we're focused on growing revenues on top of this higher base through AI driven innovation.
Sundar highlighted the credible opportunities underway with AI and the transformative impact it will have on businesses already breakthroughs in everything from natural language understanding to generative AI are fueling our ability to deliver results that drive meaningful performance for advertisers and are useful to use us takes.
Smart bidding, which uses AI to predict future AD conversions and their value, helping businesses stay agile and responsive to rapid shifts in demand.
In 2022.
<unk> advanced this boosted bidding performance, allowing us to move advertiser outcomes down the funnel to drive better ROI and use budgets more efficiently.
In search query matching large language models like mum match Advertiser offers to use inquiries.
This understanding of human intend of language combined with advances in bidding prediction or why business can see an average of 35% more conversions when they upgrade exact match keywords to broad match in campaigns that use a target CPA.
Google AI also underlies our creative products like tech suggestions and Google ads and creative optimization and responsive search ads.
We're excited to start testing are automatically created assets better which uses AI to generate headlines and descriptions for search creative seamlessly once advertisers opt in.
Then of course, there's performance Max which offers the best combination of our AI powered systems to our customers.
But we're not stopping here and these examples are an exhaustive.
It's been foundational to our ads business for the last decade, and will continue to bring cutting edge advances to our products to help businesses and use us.
Number two retail.
Our foundation for delivering value over the long term includes three pillars first we are on a multiyear mission to make Google a core part of shopping journeys for consumers and a valuable place for merchants to connect with users. This means constantly improving our consumer experiences starting with a more visual immersive browsable search.
Second we're empowering more merchants to participate in our free listings and ad experiences.
In 2022, we saw an uptick in merchants, particularly smbs and product inventory coming onto Google, adding more value for merchants remains a top priority.
Third to drive retail performance further we focus on great ads products from automation insides to bidding tools and Omnichannel solutions to airport campaigns like Pemex, we're helping retailers hit their goals and connect with customers no matter where or when they shop.
Two quick insights on Pemex, which we upgraded the majority of advertisers to from smart shopping campaigns last year.
First advertisers on average see a 12% uplift from SSE to Pemex second it was a success story during the holidays and cyber five.
<unk> to scale and to adapt to changing traffic of a volatile peak retail season drove strong results for many retailers, particularly mid market advertisers.
Moving onto Youtube.
<unk> ongoing revenue headwinds in Q4, we're confident in youtube's long term trajectory, here's how we think about our strategy.
It all starts with the creator ecosystem.
<unk> are the lifeblood of Youtube in 2022 more people created content on Youtube than ever before long form short form audio podcast music live streams, what sets Youtube. Apart is we give creators more ways to create content and connect with fence and more ways to earn money than any other platform.
More creators means more content means more viewers, which leads to more opportunities for advertisers.
The creator ecosystem in our multi format strategy will continue to drive youtube's long term growth and to support that growth. We're focused on number one ramping shorts.
Two accelerating engagement on large screen number three investing in our subscription offerings a number for a long term effort to make Youtube more shovel.
First shorts.
Viewership is growing rapidly as Sundar said $50 billion plus daily views. We're also still pleased with our continuing progress in early monetization on the creator side, it's been impressive to see the innovative ways creators are using shorts to introduce their content and extend existing channels.
We're focused on providing creators with the best content creation and monetization tools, new richer features and analytics capabilities that help individualized and optimize their content strategies. It's early days for shorts, but we're confident the runway is long.
Next connected TV, where users are increasingly watching their favorite creators on the big screen at home.
According to Nielsen Youtube is the leader in U S streaming watch time adversary.
Advertisers are leaning in with AI powered solutions, we're helping brands deliver efficient reach and ROI and address pinpoints like frequency and measurement.
Then there is all subscription offerings. It is clear the future of online video is about helping users seamlessly discover and watch content across AD supported and premium services.
Our goal is to be a one stop shop for multiple types of video content.
That's why we first offered Youtube music and premium were $80 million plus paid subscribers and trailers to enjoy their favorite content that music adds free.
We then expanded into Youtube TV significantly improving the legacy TV experience.
And then last fall primetime channels launched making streaming subscription services available on Youtube on an Ala carte basis.
Given the potential we see in our subscription offerings, we recently announced a multiyear agreement to distribute NFL Sunday ticket is.
Sundar highlighted we're excited about the opportunities this will open up.
Lastly is our focus on shop about Youtube.
Still nascent, but we see lots of potential and make it easier for people to shop from the creators brands and content They love.
I'll close with something I've said, many times before our success is only possible because of our customers and partners.
The reality is we only do well when they do well.
Since our earliest days of revenue share models have been structured around ROI for our partners from play developers that online publishers to Youtube creators artists and media orcs around the world.
Over the last three years I am proud to share that we've contributed more than 200 billion to these ecosystems.
Remain as committed as ever to fueling the next generation of businesses media companies and creativity on the web.
On that note a big thank you to our partners and customers for their ongoing collaboration and trust and two googlers for their energy focus and dedication to helping our users customers and partners succeed, especially through these tough times Bruce.
Do you.
Thank you Philip.
For the full year 2022 alphabet delivered revenues of 283 billion up 10% versus 2021 and up 14% on a constant currency basis, adding 37 billion to revenues, excluding the impact of foreign exchange.
I will briefly cover the main points of our fourth quarter results and then turn to our outlook to give you more context first centers comments on how we're focused on investing for growth as well as on reengineering, our cost base for long term success.
For the fourth quarter, our consolidated revenues were 76 billion up 1% or up 7% in constant currency search remained the largest contributor to revenue growth on a constant currency basis.
Our total cost of revenues was $35 3 billion up 7%.
Other cost of revenues of $22 4 billion were up 15% the.
The increase was driven by two factors first hardware costs due primarily to $1 2 billion and inventory related charges and secondarily to strong unit sales.
The charges reflect ongoing pricing pressures and changes in expected future inventory needs.
Second costs associated with data centers and other operations.
Operating expenses were $22 5 billion up 10%, reflecting an increase in R&D expenses, primarily driven by head count growth followed by an increase in G&A expenses, primarily reflecting an increase in charges related to accrued legal matters.
These increases were partially offset by a decline in sales and marketing expenses, primarily due to lower advertising and promotional spend.
Operating income was $18 2 billion down 17% versus last year, and our operating margin was 24%.
Net income was $13 6 billion.
We delivered free cash flow of $16 billion in the fourth quarter and $60 billion. In 2022, we ended the year with 114 billion in cash and marketable securities. We also repurchased a total of 59 billion of our class a and class B shares in 2022.
Turning to our segment results, starting with Google services revenues were $67 8 billion down 2%.
Google search and other advertising revenues of $42 6 billion in the quarter were down 2%.
Search delivered moderate underlying growth in Q4.
Absent the impact of currency movements on our reported results.
Youtube advertising revenues of $8 billion or down 8% network advertising revenues of $8 5 billion were down 9%.
Other revenues or $8 8 billion up 8%, reflecting several factors.
First significant subscriber growth in Youtube music premium and Youtube TV.
Second strong growth in hardware revenues, primarily from the pixel family.
Offsetting growth in these two areas with a year on year decline in play revenues, reflecting a particularly large foreign exchange headwind in APAC as well as the impact of reductions of Playstore fees.
<unk> was $12 9 billion down 4% Google services operating income was $21 1 billion down 19% and the operating margin was 31%.
Turning to the Google Cloud segment revenues were $7 3 billion for the quarter up 32% revenue growth in GCB was again greater than Google cloud, reflecting strength in both infrastructure and platform services.
You go Workspaces strong results were driven by increases in both seats and average revenue per seat.
In Q4, we saw slower growth of consumption as customers optimize GCB cost, reflecting the macro backdrop Google.
Google Cloud had an operating loss of $480 million.
As to our other bets for the full year 2022 revenues were $1 1 billion and the operating loss was $6 1 billion.
Turning to our outlook for the business and.
In 2022, our year on year revenue growth was affected by a number of challenges.
First we faced very tough comps given the outsized recovery in 2021 from the impact of the pandemic.
Foreign exchange headwinds grew throughout the year and third we were operating against the backdrop of a more challenging economic climate that also impacted many of our customers and which remains ongoing.
Within Google services, we are focused on investing in the opportunities we see for long term revenue growth.
First within advertising, we are focused on using advances in AI to drive new and better experiences for users and search as well as deliver to deliver better measurement.
Roy and tools for more compelling creative content to advertisers.
And Youtube, we are prioritizing continued growth in shorts engagement and monetization while also working on other initiatives across our AD supported products.
As to our outlook for other revenues in play 2022 results reflected the particularly sizable impact from foreign exchange lapping the uplift in user activity during the pandemic and the impact from the fee reductions we introduced.
We remain optimistic about the longer term prospects for mobile apps and gaming, although remain more cautious near term given industry trends.
With Youtube subscriptions were optimistic about building on its momentum across Youtube music premium Youtube TV and primetime channels.
In hardware, we continue to make sizable investments.
Particularly to support innovation across our pixel family, while working to drive greater focus and cost efficiencies across the portfolio.
For Google Cloud, we remain excited about the long term market opportunity and the trajectory of the business enterprises and governments are increasingly turning to us for their digital transformation initiatives across verticals and geographies.
All investing for growth, we remain very focused on Google clouds path to profitability.
In terms of other bets as Sundar mentioned, we will be making a financial reporting change as it relates to deep mind.
To reflect the increasing deep mind collaboration with Google services, Google Cloud and other bets beginning in the first quarter deep mine will no longer be reported in other bets and will be reported as part of alphabet corporate costs.
I'll now walk you through the key elements of our efforts to deliver a durable reengineering of our cost base in order to slow the pace of operating expense growth.
We expect the impact will become more visible in 2024.
First with respect to alphabet head count we are meaningfully slowing the pace of hiring in 2023, while still investing in priority areas in.
In Q4, we added 3455 people as in prior quarters, the majority of hires or for technical roles.
With respect to our recent announcement that we are reducing our workforce by approximately 12000 roles.
Most of the impact will be seen in Q1.
We will take a severance charge of one nine to $2 3 billion, which will be reported in corporate costs. We will continue hiring in priority areas with a particular focus on top engineering and technical talent as well as on the global footprint of our talent.
Second we have a longer term effort underway to reengineer, our cost base in three broad categories first using AI and automation to improve productivity across alphabet for operational tasks as well as the efficiency of our technical infrastructure.
Managing our spend with suppliers and vendors more effectively and third optimizing how and where we work.
In the first quarter of 2023, we expect to incur approximately $500 million of costs related to exiting leases to align our office space with our adjusted Global head Count look this will be reflected in corporate costs, we will continue to optimize our real estate footprint.
Turning to Capex for 2023, we expect total capex to be generally in line with 2022 with an increase in technical infrastructure versus a decline in office facilities, our ongoing investment in technical infrastructure is obviously, a critical component of supporting our long term growth opportunities.
Finally, I will point, you to our earnings release, and which we noted that we adjusted the estimated useful lives of servers and certain network equipment. Starting in Q1 'twenty. Three we expect these changes will favorably impact our 2023 operating results by approximately $3 4 billion for assets in service.
As of year end 2022, Thank you Sundar, Philip and I will now take your questions.
Yeah.
Thank you as a reminder to ask a question you will need to press star one one on your telephone to prevent any background noise. We ask that you. Please mute your line. Once your question has been stated.
And our first question comes from Brian Nowak with Morgan Stanley . Your line is open.
Thanks for taking my questions I have two the first one.
On AI and sort of the cost of AI I appreciate all the color, but all the AI tools that are to come I guess.
First question is how should we think about the potential impact on capex and that higher compute intensity of these AI tools to come potentially impacting margins over the next couple of years.
And then the second one Ruth really appreciate the conversation about long term efforts underway to improve efficiency.
Should we think about potential impacts of those efforts in 'twenty three 'twenty four of you sort of running sizes of what types of savings, we could see roll through the P&L over that period.
Thanks for the question so starting on.
Your question about AI and Capex.
Capex as I think Sundar and Philip boats noted AI is already incorporated many of our products products like perf performance, Max and smart bidding in cloud.
Sundar said it is more compute intensive but also opens up many more services and products for our users for creators for advertisers.
That being said, we're very focused on further optimizing the cost of compute and that's across all elements data center servers.
Our supply chain. So we're continuing to invest with a keen lens on the return on that capital.
And as I indicated in opening comments when we look at Capex for 2023, we do expect it's going to be generally in line with 2022 with an important mix shift we're increasing our investments in technical infrastructure and that's not just for AI, that's to support investments across alphabet, and particular in cloud as well and at the.
Same time, we're meaningfully decreasing our capex for office facilities, and then with respect to the overall efficiency opt.
Opportunities, yes, very keen focus on the three areas that I noted.
And one of the key elements of it is using AI and automation to improve productivity.
And efficiency of our technical infrastructure.
Noted that we want to be focused and we are focused on durable improvements to our expense base and that's because if you go through the items that work streams that we have in flight they take longer to implement execute their in process now and they continue to build on themselves and continue to provide added upside as we go through time, which is.
Why I indicated you would see more of an impact on 2020 for it than in 2023, but we're continuing to work with them.
Yeah.
Great. Thanks, Chris.
And our next question comes from Michael Nathanson.
Nathan.
Thanks.
I have two.
First one are you both mentioned the NFL and your remarks and the opportunities it opens up.
Come in and help us define what do you see is that longer term opportunity why it's so critical to have the NFL.
First many sports side still to be had.
Help us why this is so important to you and then.
There'll be said in the past about the scaling of monetization Youtube shorts, what are the sticky factor as well.
I am truly bring advertisers on or does some of the things you've seen and heard that you saw to make us more quickly monetize volt product. Thank you.
Yes. Thank you so much for the question.
We think there is a lot of great opportunities to differentiate the user and creator experience.
With our unique capabilities. It basically means that every Youtube view of who is interested in get FL.
I have one click access to the full offering of Sunday ticket.
As an add on package.
On Youtube TV subscription and as a standalone offering on prime time channels.
This will be the first time that Sunday ticket is actually available Ala carte for fans.
On <unk>, we're building the ability for subscribers to for example watch multiple screens at once.
And on Youtube CTV will be adding new features specific to the Sunday ticket experience like comments chats polls and so on.
On the creator side imagine all the innovative ways. They can create with exclusive NFL content behind the scenes of indexes and so on and we're really excited to see what they'll do across long form short life streams.
And more.
On your second question.
On the short side as I said earlier viewership is growing rapidly.
$50 billion, plus daily views up from $30 billion last spring.
We're still pleased with our continued progress in monetization closing the gap between short and long form is a big priority for us.
As is of course, continuing to build a great creator and user experience, which we're paying a lot of attention to.
As on shorts aren't available gives you a bit of a sign for the progress you have viewed video action App discovery performance Mexican pains.
Via product feed shorts are also shovel and again, we're the only destination, where creators can produce all forms of content across multiple formats across multiple screens.
And really with multiple ways to make a living.
And so on are shared just yesterday, we brought revenue sharing to shorts Youtube partner program.
Ultimately our goal is to make Youtube placed place for shorts and creators and Thats really what our focus is at the moment.
Yeah.
And our next question comes from Douglas Anmuth with Jpmorgan. Your line is open.
Thanks for taking the questions one for Sundar and one for Ruth.
For Sundar could you just talk more about how you can bring the AI products to market with the principals and integrity.
You talked about and how you can do that without sacrificing quality or trust along the way and then Ruth.
Bruce clearly the language around reengineering, our cost structure in a durable way and everything that went along.
Different than what we've heard in the past.
Is there any way at all to help us quantify how youre thinking about these efforts. Thanks.
Sure.
Thanks, Doug.
The AI side.
It is a really exciting time I think we've been investing for a while and it's clear that the market is ready consumers are interested in trying out new experiences.
I think I feel comfortable with all the investments we have made in making sure we can develop AI responsibly.
And we'll be careful we will be launching.
Two more.
Morris labs products in certain cases, a beta features in certain cases.
And just slowly scaling up from there obviously, we need to make sure we are trading in public.
These models will keep getting better so the field is fast changing.
Selling costs will need to be improved so I view it as very very early days.
Commented to putting out experiences.
Both both.
Both in terms of new products and experiences actually bringing that at an Olympics being just in search I'm, making Apis available for developers and enterprises and learn from that and it trades like we've always done so I'm looking forward to it.
And then on your second question when we talk about.
<unk> focused on delivering sustainable financial value that obviously means that expense growth cannot be growing out of revenue growth and we're focused on revenue upside as well as durable changes to the expense base to really ensure we have the capacity to invest in that growth.
Clearly the emphasis of revenue growth, there's a lot that's exciting ahead of us.
Within digital services all of the AI advances advancements that are improving advertiser ROI in the search user experience and more broadly as we've talked about across the key product areas and then very importantly on expense growth. We have a very strong commitment to we can't keep emphasizing durably.
Reengineer, our cost base and that will benefit all of the segments across alphabet and the key components.
Slowing the pace of hiring is it starting point product prioritization across Google as Sundar said is key improving economics and hardware as we focus intently on the pixel line and cost structure, then using AI and automation to improve productivity for operational task as well.
As for the efficiency of our technical infrastructure, where we have a number of work streams.
Managing our spend as I said with suppliers and vendors and then optimizing how and where we work and lease up part of that with the real estate consolidation given the slower head count growth all of those not only benefit Google services, but many of those similarly drive.
I'd say, a greater efficiency across alphabet and so as we've said in cloud we remain very focused on the path to profitability. That's our revenue and margin driver and then with the other bets. We're similarly focused on investing sustainably and so to go back to it.
The durable nature of change in some of the elements that I've talked about here where work is ongoing.
Start to see impacting in 'twenty, three but to really get full year run rate and the benefit of it.
There is work ongoing and that's why with.
Emphasize this notion of it comes in and then really you see the run rate in 'twenty four.
That's helpful. Thank you both.
Okay.
Our next question is from Eric Sheridan with Goldman Sachs. Your line is open.
Thank you so much maybe two if I could sundar for you continuing on the AI team.
Philosophically about capturing the opportunity set that you see in front of you given all the investments you've made over the last.
Five plus years that we've been talking about going back to a lot of Google iOS.
Versus potentially disrupting the user experience or the monetization or can your existing product set and striking the right balance between the opportunity set and being disruptive to yourself. What do you think about looking forward over the next couple of years.
And then Ruth maybe just following on some of the questions and debates on the cost structure. Obviously other bets is an area where the losses continue to be sort of higher than what some other thing from the outside looking in but then you showed some improvement in the losses in the cloud Division this quarter, how should we be thinking about the rationalization.
<unk> of the cost structure and aligning cost with opportunity sets across some of the divisions of alphabet. When do you think for the medium to long term. Thanks, so much.
Thanks, Eric.
I do think first of all.
Such a foundational.
Technology, and we've been investing not just in terms of research, but actually getting it all the predictions scale already we had already deployed.
If you look at the impact things like book in London had on search quality, making search multimodal driving the usage of products like Google lens.
I feel like we've been scaling up well in.
In Google cloud today with vertex AI, we'd already been bringing AI Apis to enterprises and they are in a pretty healthy growth path. So we do see secular opportunities ahead.
Both in terms of putting these Apis out making sure every developer every organization in the world can use it and as I said earlier, we had very very early days.
I think theres a lot of room ahead.
In terms of search too.
Now that we can integrate.
Direct and 11 type experiences in search I think that will help us.
Expand and serve new types of use cases generate of use cases, and so I think I see this as a chance to.
We think and re imagine and drive search to solve more use cases for <unk>.
Our uses of swap. So again early days, you will see us be bold could put things out get feedback and iterate and make things better.
And then in terms of your question about other in other bad investment level. So as we've talked about in prior calls our goal for other bets is to use our deep technology investments to drive innovation with real potential for value creation and at the same time, we are very focused on the overall pace of investment and the financials.
Turns and so what we're really looking at here or what are the opportunities for monetization and commercialization.
As I've said on prior calls you know there is no monolithic approach across the portfolio, but we are very focused on whether what's the pace of investment opportunities for monetization and commercialization.
Just a bit more with respect to the deep mind move.
To be very clear, we consolidate another bat integral go only when that that supports products and services within Google or for alphabet broadly and you saw us do that some time ago. When we moved Chronicle as an example.
Into combining with our cloud business and really the cyber security offering that is now in cloud and that was very effective with AI. This is obviously, an alpha that strategic priority and we see huge opportunity ahead, and deep minds researches core to that future across the product areas in alphabet.
Portfolio and so this reporting change reflects the strategic focus in deep mind, the support of each one of our segments.
And that as I indicated that beginning Q1 deep mine financials will be reported within.
There are corporate cost segment.
Thanks, so much.
Our next question from Justin Post with Bank of America Merrill Lynch. Your line is open.
Thank you for taking my question.
Taking into search kind of low single digit growth ex FX can you talk about the pressures there volume versus pricing or CPC.
What's really driving the slowdown it's kind of almost back to 2009 recession levels, just think about that and then any signs that were near our bottom any stabilization in growth rates. You can you can talk about or how your outlook is for 'twenty three on that thank you.
So overall as as we've indicated we remain very excited about all the work we're doing in search the utility for all of us and so that's why you've.
<unk> heard so many comments about.
The application of AI and what that means for the ongoing opportunity you had a number of different questions. In there I think one was on volumes and in the 10-K that will be filing shortly you'll see that for the full year 2020 to CPC were down 1% versus last year.
And as we've talked about in prior quarters. The change in Cpc's can reflect a number of different factors geographic mix property mix all sorts of things clicks were up 10% in 2022, reflecting a number of factors, including increased engagement, primarily on mobile devices and improvements in ad form.
That's but I think overall, we're really excited about what we see ahead, we're not going to predict that the global environment. We did say the challenging backdrop is ongoing and you can see that but we're very focused on what we can control and I think most important and what we're really excited about here is innovation to help adverse.
Titers overall.
And our cost reengineering that really gets us to align us long term sustainable value creation.
Thank you.
Okay.
Okay.
Our next question is from Ross Sandler with Barclays. Your line is open.
Hi, Yeah, just a question on the hardware business.
Clearly doing quite well, but it seems like there's been issues around other areas.
Inventory write downs, if you could maybe you guys just talk about in your mind, the strategic importance of having.
The wide range of hardware products you have in that segment as it relates to your overall AI initiatives. Thanks a lot.
Thanks, Ross first of all very very pleased with how pixel is performed through a challenging Matt.
The macro environment.
Look I think.
<unk> portfolio is incredibly important.
It's what allows us to to for us to invest in <unk>.
Drive innovation forward.
You have to put it all together as a product and ship it and I think it ends up playing a very very.
A big role in guiding the ecosystem as well.
And increasingly I think users are thinking beyond beyond folds in.
Thinking through a holistic ecosystem to give one example.
US undertaking pixel launching.
This is part of that integrating fitbit and bringing into our ecosystem as well partnering closely with Samsung on Merrell as the combination is what has driven.
Or a 300% increase in actives.
Android once this ecosystem so to just to give you a context on that so we are very thoughtful about how we are approaching this area and as <unk>.
Mentioned.
Across across all these areas too we.
Are working to drive greater focus in cost efficiencies in the portfolio.
The work to a challenging <unk>.
Supply chain environment as wellness.
Challenging environment on the demand side and so we'll continue focusing on improving all of this in a durable way.
Yeah.
And our next question comes from Mark Mahaney with Evercore ISI. Your line is open.
Hey, I'll just ask one question on Ruth you mentioned, a couple of times getting Google cloud to profitability and could you just talk to how that gets done you have to almost 40% growth in Google cloud the operating loss level stayed about the same from 'twenty one to 'twenty. Two so the growth is there what are the factors that need to be solved in order to get you know pretty.
Nice profitability out of that segment.
Sort of anywhere akin to what Azure and AWS had been able to show over the years. Thank you.
Thanks for the question so as we've talked about on prior calls with Google Cloud, we've really been investing our head of <unk> of our revenues given the growth in the opportunity overall and the desire to ensure that whereas L. Equip.
Equipped able to support customers across segments around the globe and so theres been meaningful investment.
To position ourselves to really have the momentum that the team has continued to.
To deliver.
That being said they are as both Sundar and I have noted extremely focused on the path to profitability in every element of that and some of the items that I noted that benefit.
Alphabet generally most certainly are relevant here for cloud as well everything from our efficiency with our technical infrastructure, which we're we're very excited about all the efforts that theyre doing there and more broadly so.
This has been really to ensure first and foremost given the scale of the opportunity and the speed with which it's moving that we're positioned to be.
With our customers to provide them with the analytics the skills the capabilities that are needed to build for long term growth and we're at a position now where we've meaningfully closed the the gap to profitability, but still are working through as we continue to invest for growth while narrowing what this is arne.
Our march to profitability.
Thank you Ruth.
Yeah.
And our last question comes from Brent Thill with Jefferies. Your line is open.
Good afternoon, Bruce can you give us a sense of what Youre seeing in Q1 is this year a little more seasonal than historic are you observing any different patterns. Just just one over one month into the into the year can you give us any color in terms of how you're framing this quarter.
And so I think as you know.
Well we.
Don't tend to we don't provide exit run rates. What we tried to do is give you the context within which we're approaching the overall business and the.
The priorities that we have as we're looking at revenue upside and the and the growth levers there as well as how to reengineer our expense base to deliver attractive returns so not not really much to add to the comments that you've heard to date and we're continuing to execute across each one.
One of the elements we discussed.
Thank you.
Thank you and that concludes our question and answer session for today I'd like to turn the conference back over to Jim Friedland for any further remarks.
Thanks, everyone for joining us today, we look forward to speaking with you again on our first quarter 2023 call. Thank you and have a good evening.
Thank you everyone. This concludes today's conference call. Thank you for participating you may now disconnect.
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