Q1 2023 Alphabet Inc Earnings Call

Welcome everyone. Thank you for standing by for the alphabet first quarter 2023 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star 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 alphabet first quarter 2023 earnings conference call.

With us today are Sundar, Pichai, Philipp Schindler and Ruth 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.

For more information please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC.

During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at ABC Dot X Y Z forward Slash investor.

Our 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.

I'm pleased with our business performance in the first quarter, but search performing well and momentum in cloud.

Introduced important product updates anchored in deep computer science and AI.

Our North Star is providing the most helpful answers for our users and we see huge opportunities ahead.

Continuing our long track record of innovation.

On cloud, we continue to be on a long and exciting journey to build that business.

Loud delivered profitability this quarter and we remain focused on long term value creation here.

Today I'll give an update on the two themes I spoke about last quarter, one our advancements in AI and how they are driving opportunities in search and beyond.

And to our efforts to sharpen our focus as a company.

Then I'll talk about our momentum in cloud and close with our progress at Youtube.

First the incredibly I opportunity for consumers, our partners and for our business.

Compared it to the successful transition we made from desktop to mobile computing over a decade ago.

Our investments and breakthroughs in AI over the last decade have positioned us well in our last call I outlined three areas of opportunity.

Continuing to develop state of the art large language models and make significant improvements across our products to be more helpful to our users.

Empowering developers creators and partners with our tools.

And enabling organizations of all sizes to utilize and benefit from our AI advances.

We have made good progress across all three areas.

In March we introduced our experimental conversational AI service called bar.

We have since added our palm model to make it even more powerful and bought can now help people that programming and software development tasks, including cogeneration lots more to come.

For developers, we have released our palm API alongside our new maker suite tool.

It provides a simple way to access our large language models and begin building new generative AI applications quickly.

A number of organizations are using our generative AI large language models across Google cloud platform, Google Workspace, and our cyber security offerings.

For years, we've been focused on making <unk>, even more helpful from Google lens to multi searched to visual exploration in search.

Most of you in maps, Google translate to all the language models powering search today.

We've used AI to open up access to knowledge and powerful ways.

We'll continue to incorporate generated way I advances to make search better in a thoughtful and deliberate way will.

We'll be guided by data and years of experience about what people want and our high standards for quality.

And we will test and iterate as we go because we know that billions of people Trust school to provide the right information.

As it evolves, we'll unlock entirely new experiences in search and beyond just this camera voice and translation technologies have all open entirely new categories of queries and exploration.

AI has also been foundational to our ads business for over a decade.

Products like performance Max use the full power of Google's AI to help advertisers find untapped and incremental conversion opportunities.

Philip will talk more about this in a moment.

And as we continue to bring AI to our products, our AI principles and the highest standards of information integrity remain at the core of all our work.

As one example, our perspective API helps to identify and reduce the amount of toxic text that language models train on with significant benefits for information quality.

This is designed to help ensure the safety of generator of AI applications before they are released to the public.

We are proud to have world class research teams, who have been advancing the breakthroughs underpinning this new era of AI.

Last week I announced that we are bringing together the brain team and Google Research and deep mine into one unit.

Combining all of this talent into one focused team backed by the pool computational resources of Google will help accelerate our progress and develop the most capable AI systems safely and responsibly.

Onto my second theme the company's sharpened focus I spoke last quarter about our commitment to invest responsibly and with discipline.

And to find areas, where we can operate more cost effectively and with greater velocity.

We have significant multiyear efforts underway to create savings such as improving machine utilization and finding more scalable and efficient base to train and so machine learning models.

We are making our data centers more efficient redistributing workloads and it could blend where service arent being fully used this.

As important work as we continue to significantly invest in infrastructure to drive our many AI opportunities.

Improving external procurement is another area, where data such as significant savings in this work is underway.

And we're taking concrete steps to manage our real estate portfolio to ensure it meets our current and future needs.

We'll continue to use data to determine additional areas for durable savings.

Next Google Cloud I'm pleased with the ongoing momentum in cloud our disciplined expansion of our product roadmap and go to market organization has helped to build one of the largest enterprise software companies in the world.

We have consistently grown top line revenues and improved annual operating margins and we continue to do so this quarter.

Our growth has come from our deep relationships with large enterprises.

Strong partner ecosystem, and our product leadership.

Over the past three years Gcb's annual deal volume has grown nearly 500%.

Large deals over $250 million growing more than 300%.

Nearly 60% of the world's 1000 largest companies our Google cloud customers.

And many leading startups and millions of small and medium enterprises use Google cloud.

We've also built a strong partner ecosystem.

Over the last four years, the number of Google Cloud partner certified practitioners around the world has increased more than 15 times.

The largest global system integrators have built 13 dedicated practices with Google cloud compared to zero when we started.

And today more than 100000 companies are part of a Google cloud partner advantage program.

Our growth is also driven by our product leadership.

We are bringing our generative AI advances to our cloud customers across our cloud portfolio.

Our palm generated AI models, and vertex AI platform are helping behave ox to identify insider threats.

Ox body cut to test its autonomy vehicles.

And light tricks to quickly develop <unk> features.

In workspace, our Neogen right away I features are making content creation and collaboration even easier for customers like standard industries and left.

This builds on our popular AI part workspace tools smart canvas and translation hub used by more than 9 million paying customers.

Our product leadership also extends to our data and analytics, which provides customers the ability to consolidate their data and understand it better using AI.

New advances in our data cloud enable ulta beauty to scale, new digital and omnichannel experiences, while focusing on customer loyalty.

Shopify to bring better search and personalization using AI.

And most of that expense to bring new products to market more quickly.

We have introduced generate of AI to identify and prioritize cyber threats automate security workflows in response and help scale cyber security teams.

Our cloud cyber security products helped protect over 30000 companies Inc.

Including innovative brands like Broadcom and Europe's telepath.

We are successfully integrating mandy and with our products, including Monday and threat intelligence and breaching Alex.

Our open approach to AI development, coupled with our industry, leading tpu's and best in class Gpus from Nvidia enable innovative companies to tackle any AI workload with speed and flexibility.

AI twenty-one labs rep late mid journey, and many others build and train foundation models and generate of AI platforms.

We are the only cloud provider to announce the availability of Nvidia as new al four tensor core GPU with the launch of our <unk>, which are purpose built for large inference AI workloads, such as generative AI.

Yeah.

Turning next to Youtube, let me start by thanking Susan Wojcicki for her terrific leadership of Youtube for nine years.

She recently transitioned into an advisory role with alphabet this quarter with Neal Mohan a longtime leader at Google and Youtube, becoming the new head of Youtube.

Here are a few highlights from the quarter.

Youtube shots continues to see strong momentum with creators.

Last year, the number of channels that uploaded to shots daily grew over 80%.

Those posting weekly on shots saw the majority of new channel subscribers coming from their shots sports.

The living room remained our fastest growing screen in 2022 in terms of watch time, and we are seeing growth and momentum internationally.

On our subscription business, we rolled out several new updates to Youtube premium.

Premium subscribers can now cube videos on phones and tablets stream continuously by switching between devices and auto download recommended videos for offline viewing.

And we have great momentum around Youtube, TV and Youtube primetime channels.

We've announced pricing for the NFL Sunday ticket offering which will help to drive subscriptions.

Bring new viewers to Youtube has paid an AD supported experiences.

And create new opportunities for creators.

To close across the company. We are excited about helping people businesses and society reached their full potential with AI.

Chad updates at Google Io, but how we are using AI across our products, including our pixel devices and share some exciting new developments for Android.

Thanks to our employees around the world, who continue to work hard to advance our mission.

After nearly 25 years the work to organize the world's information and make it accessible and useful is as urgent as ever and I look forward to the work ahead.

Over to you Philip.

Thanks, Sundar and hey, everyone. It's great to be here today I'll kick off of Google services performance in the first quarter, then provide color into our key opportunity areas and then turn it over to Ruth for more on our financial performance.

<unk> services revenue of 62 billion were up 1% year on year, including the effect of a modest foreign exchange headwind.

And Google advertising search and other revenues grew 2% year over year, reflecting an increase in the travel and retail verticals offset partially by a decline in finance as well as in media and entertainment.

And Youtube ads, we saw signs of stabilization and performance while in network there wasn't incremental pull back in advertising spend.

Google other revenues were up 9% year over year led by strong growth in Youtube subscriptions revenues.

Now, let's double click into the three areas I laid out last quarter, where we see clear opportunities for long term growth and advertising number one Google AI number two retail which cuts across all of our ads products and surfaces and number three.

Chip.

First Google AI I've said before AI has long been an important driver of our business advancements are powering our ability to help businesses big and small respond in realtime to rapidly changing market and consumer shifts and deliver measurable ROI when it's needed most.

In Q1, we continue to innovate across all products take core search for example, and targeting we updated search keyword relevance using the latest natural language AI from mum models to improve the relevance and performance of shown ads. When there are multiple overlapping keywords eligible for an auction.

In bidding we improved our smart bidding models to bid more accurately based on differences in search AD formats in other words bid more effectively depending on how a user wants to engage within that.

And Creatives, we opened automatically created assets better to all advertisers in English.

Generates text assets alongside your responsive search ads and uses AI to help reduce the amount of manual work to keep creatives fresh and relevant to use us Corey context and to the advertising business.

Two then unlock core search further and maximize conversions across all of Google, We're actively helping more advertisers paired together with performance Max.

Advertisers, who use pemex are on average achieving over 18% more conversions at a similar CPA.

This is up five points in just 14 months, thanks to advances in the AI underlying bidding creatives search core matching and new formats like Youtube shorts.

I mentioned earlier that travel was a contributor to growth in March we launched <unk> for travel goals no. Even the smallest torchwood years can benefit from the expanded reach of hotel ads and Pemex.

<unk> family run curricular hotels group, who drove a 32% increase in revenue and a 26% increase in total direct bookings within just one month of using Pemex for travel goes.

There's more to come here as we had even more AI powered features stay tuned for more at Google marketing live in May.

Moving onto retail, where we had a solid quarter. All focuses on three pillars number one making Google a core part of shopping journeys for consumers and a valuable place for merchants to connect with users number to empowering more merchants to participate in our free listings and adds experiences and number three driving retail performance further with great ads product.

<unk>.

The microenvironment of do more with less tools and solutions are proving that we can deliver value for retailers online and omnichannel and drive high value customers even in challenging times.

Caraway direct to consumer makeup of cookware used targeted ROE as to uncapped budgets in pemex to optimize and deploy spend across Google inventory for its Q4 Black Friday campaign <unk>.

<unk> drove a 46% increase in revenue and 31% jump in <unk>, leading to car waste best business day in history, and a robust reinvestment is AI for a strategy for Q1.

For omni focused retailers, we recently rolled out store sales reporting and bidding and performance Max for store goals.

This is helping retailers go beyond just optimizing to online conversions to also optimize to their stores, reaching in bidding for high value customers, who are more likely to spend in store.

<unk> Department store magazine recently used our store sales solution to boost its omnichannel Roe at 128% versus online only campaigns.

Thanks to dynamic in stroke values coming from its first party data, including its high value customers magazine can know with confidence measure the full impact of its online investments on both e-commerce and physical store revenue.

Turning to Youtube creators fuel Youtube success.

Across lung firm and shorts music and podcasts vertical and horizontal Youtube is where creators are incentivized to make their best work, which means the best content more views and more opportunities for advertisers.

As I said last quarter, our creator ecosystem in multi format strategy will be key drivers of Youtube as long term growth and to support this growth. We're focused on number one shorts number two engagement on CTV.

<unk> investing in our subscription offerings and number four a longer term effort to make Youtube more shopper won first shorts.

We're seeing strong watch time growth monetization is also progressing nicely.

People are engaging in converting on ads across Schwartz at increasing rates.

Number two connected TV.

As Sundar said, we're seeing momentum globally viewers love watching Youtube creators and their favorite content on the large screen advertisers are leaning in.

Assuming out more broadly for a second across Youtube, we're helping brands benefit from our extensive reach and drive the profitability they're looking for.

And one of our largest marketing mix modeling studies to date Youtube Ara is 40% higher than linear television and 34% higher than all other online video. According to our customer analysis from January 2020 to March 2022 of Nielsen compost Ora benchmarks across 16 countries and $19 billion of total media spend measured.

This proves Youtube stability to drive effectiveness at scale.

Next up our subscription offerings.

The goal is to be a one stop shop for multiple types of video content across both AD supported and premium services.

Our launch of multi view on Youtube TV and our first of its kind Ala carte excess for NFL Sunday ticket are two examples of how we're investing here.

More updates over the coming quarters.

Number four shopping on Youtube, it's still Super early days, one highlight last year, we brought shopping to a more creators and brands by partnering with commerce platforms like Shopify.

No more than 100000 creators artists and brands have connected their own stores through the Youtube channels to sell their products. We're excited about the potential ahead.

I'll close with an Awesome example of how we're bringing the best across Google to our partners to accelerate innovation.

Mercedes Benz and.

In February we announced a first of a kind partnership to bring Google maps platform and Youtube into future Mercedes Benz vehicles equipped with its Nextgen MB OS operating system.

Beyond enabling the luxury automaker to design a customized navigation interface will also provide AI and data cloud capabilities to advance their autonomous driving efforts and create an enhanced customer experience.

On that note a big thank you first to our customers and partners for their trust and collaboration and second to our Googlers for all of their incredible work this quarter Ruth over to you.

Thank you fill up our financial results for the first quarter reflect continued healthy fundamental growth in search and momentum in cloud as I.

Go through the discussion today I will reference some changes to our reporting and disclosures that are covered more fully in the 8-K, we filed last week I will conclude with our outlook.

For the first quarter, our consolidated revenues were $69 8 billion up 3% or up 6% in constant currency.

Search remains the largest contributor to revenue growth on a constant currency basis.

In terms of expenses and profitability year on year comparisons are impacted by three factors.

First the $2 6 billion in charges, we took in the first quarter related to workforce and office space reductions, we provided a table in our earnings release that shows the impact of those charges and cost of revenues and operating expenses.

Second the adjustment we made to the estimated useful lives of servers and certain network equipment at the beginning of 2023.

As you can see in our earnings release the effect for the first quarter was a reduction in depreciation expense of $988 million.

Third the shift in timing of our annual employee stock based compensation awards from January to March delays the step up in SBC from Q1 to Q2. This shift in timing does not affect the total amount of SBC over the full year 2023.

Total cost of revenues was $30 6 billion up 3% driven by other cost of revenues of $18 9 billion, which was up 7%. The biggest factor of which was compensation costs associated with data centers and other operations and followed by content acquisition costs.

Operating expenses were $21 8 billion up 19% with a significant impact from the charges related to workforce and office space reductions operating income was $17 4 billion down 13% and our operating margin was 25% net.

Income was $15 1 billion.

We delivered free cash flow of $17 2 billion in the first quarter and 62 billion for the trailing 12 months, we ended the quarter with 115 billion in cash and marketable securities.

Turning to our segment results. These were affected by two additional changes outlined in our 8-K filing first reflecting the increasing collaboration between deep mine and Google services, Google Cloud and other bets as of Q1 deep mind is reported as part of alphabet Enel.

Allocated corporate costs and second beginning in the first quarter, we updated our cost allocation methodologies to provide our business leaders with increased transparency for decision making.

Our filing we provided a recast of prior period results for the segment for these two changes.

Highlights of the year on year performance of our segments that I'll review reflect these recast results.

Starting with the Google services revenues were 62 billion up 1%, Google search and other advertising revenues of $40 4 billion in the quarter were up 2%.

Youtube advertising revenues of $6 7 billion were down 3% net.

Network advertising revenues of $7 5 billion or down 8%. Other revenues were $7 4 billion up 9%, reflecting primarily ongoing significant subscriber growth in Youtube TV and Youtube music premium.

TAC was $11 7 billion down, 2%, primarily reflecting a mix shift between search and network.

Google Services operating income was $21 7 billion down 1% and the operating margin was 35%.

Turning to the Google Cloud segment revenues were $7 5 billion for the quarter up 28% growth in GGP remained strong across geographies industries and products.

Workspaces strong results were driven by increases in both seats and average revenue per seat Google.

Google Cloud had operating income of $191 million and the operating margin was two 6%.

As to our other bets for the first quarter revenues were $288 million and the operating loss was $1 2 billion.

Turning to our outlook for the business in terms of the operating environment. Our results in the first quarter reflected ongoing headwinds due to a challenging economic environment and the outlook remains uncertain.

Foreign exchange headwinds have moderated and we expect less of a foreign exchange headwind in the second quarter based on current spot rates.

With respect to give those services within advertising Q1 results reflect the resilience of search with its unique ability to surface demand and deliver measurable ROI.

Excluding the impact of foreign exchange the revenue growth of search with similar to last quarter.

And Youtube, we saw signs of stabilization in AD spend on a sequential basis, we continue to prioritize growth in shorts engagement, where we are encouraged by progress in monetization.

As to other revenues and Youtube subscriptions, we are pleased with the significant ongoing subscriber growth and loyalty Youtube music premium and Youtube TV.

In play revenues were down year on year, primarily due to the continued impact of foreign exchange in APAC. Although results have improved as we lapped the impact from our introduction of fee reductions last year.

Turning to Google cloud, our investments in product innovation, our go to market organization and our partner ecosystem delivered strong results as customers across industries and geographies increasingly rely on Google cloud to digitally transform their businesses that being said.

In Q1, we continued to see slower growth of consumption as customers optimized GCB costs, reflecting the macro backdrop, which remains uncertain.

In terms of operating performance, we remain focused on driving long term profitable growth and cloud, while continuing to invest given the substantial opportunity move.

Moving to other bets in the first quarter, we similarly worked to refine strategies and prioritize efforts across the portfolio, including reductions to head count.

I will now walk you through an update on our efforts to reengineer, our cost base slowing the pace of operating expense growth, while creating capacity for key investment areas, particularly in support of the AI across the company.

First as discussed on our fourth quarter call, we have efforts underway in three broad categories.

Number one using AI and automation to improve productivity across alphabet for operational tasks as well as the efficiency of our technical infrastructure number two managing our spend with suppliers and vendors more effectively and number three continuing to optimize how and where we work.

As we've noted previously all three work streams are ramping up this year and we plan to build on these efforts in 2024 and in subsequent years.

Second with respect to head count growth the reported number of employees at the end of the first quarter includes almost all of the employees impacted by the workforce reduction we announced in January we expect most of the impacted individuals will no longer be reflected in our head count by the end of the second quarter and.

Terms of the outlook for head count for the year as we shared last quarter, we are meaningfully slowing the pace of hiring in 2023, while still investing in priority areas, particularly for top engineering and technical talent.

In terms of our investments in AI. We are excited about the creation of Google Deep mine, combining the brain team from Google Research with deep mine with the goal to accelerate innovation and impact beginning in the second quarter of 2023, the costs associated with teams and activities transferred from Google <unk>.

Search will move from Google services to Google Deep mind within alphabet unallocated corporate costs.

Finally, as it relates to Capex for 2023, we now expect total capex to be modestly higher than in 2022.

As discussed last quarter Capex. This year will include a meaningful increase in technical infrastructure versus a decline and office facilities. We expect the pace of investment in both data center construction and servers to step up in the second quarter and continued to increase throughout the year. Thank you.

Sundar, Philip and I will now take your questions.

Thank you.

Reminder, to ask a question you will need to press star one on your telephone.

To prevent any background noise, we ask that you. Please mute your line. Once your question has been stated.

Your first question comes from Brian Nowak of Morgan Stanley . Please go ahead.

Great. Thanks for taking my questions I have two.

First one for for Sunday or sooner I guess as you think over the course of the next 12 months and you have a lot of new AI tools to show us what new behavior changes or capabilities are you. Most excited about for users developers and advertisers as these as these tools come out and then the second one for Ruth.

Could you talk to us about how much of the AI tools have you incorporated internally to sort of drive more productivity out of your engineers. Your sales force your G&A or is that sort of something to come over the next couple of years. Thanks.

Thanks, Brian It is an exciting time I do think we see an opportunity to Oh.

Cross the.

Our breadth of what we do at Google to improve our experiences obviously search we've been using AI for awhile.

What has really helped lead search and search quality for the past few years.

Using our labs, we now have a chance to more natively user labs, and I think I think the main way.

By the way as I said in my remarks, we are going to be deliberate we have an O are not startups getting it right for users. So we'll iterate and innovate as we have always done.

The media maybe I'm excited by is you we do know from experience that users come back to search they follow on are there engaging back on stuff they already did and so for us.

To use at 11 and a baby can serve those use cases, better I think it's a real opportunity obviously, if its youtube the chance to really improve experiences for creators and consumers in terms of how the videos are viewed at such I think you can expect changes.

Workspace, we already have changes are rolling out and and it's an area, where I think we'll see the biggest advances because I think productivity is a strong use case in which generated way I can help and obviously on cloud you know this has been a important moment is pretty much every organization is.

Thinking about how to use AI to drive transformation and so across the board from startups to large companies are they are engaging with us and so.

So I view it as a point of inflection.

Inflection there as well and then in terms of the second part of your question AI has been so much a part of what we've been doing for quite some time that there are a number of different ways to answer. It. One is as I noted we have a number of our efficiency efforts underway in one of them is about using AI and automation to further improve productivity across out.

So that that being said, we already have AI and a lot of what we do for example, and the way we operate and run the finance organization is helpful. In a lot of the analytics that we use and one of the exciting things for US is the opportunity then to share that with cloud customers and Sundar just noted what we're doing within Google Workspace, We obviously all live on Google Workspace and so that's another <unk>.

Ample of how we benefit internally from the productivity from AI, but it's also something that's available for users and enterprise customers more broadly and then finally one of the areas that we've talked about is the opportunity with our compute capacity and all that we've done there and the infrastructure innovation, which again is helpful internally for what we do that on behalf of our customers.

Great. Thank you both.

Thank you. The next question comes from Doug Anmuth of J P. Morgan. Please go ahead.

Thanks for taking the questions one for Sundar and one for Ruth.

Just as you think about integrating barden your search product over time can you just talk more about what percentage of search queries. You think would utilize large language model type responses and how should we think about the cost of running search on these models relative to today.

And then Ruth.

Just hoping you could follow up on your comment on Capex.

And if you could help us understand but modest step up in capex relative.

Relative to three months ago. Thank you.

Thanks, Doug.

Obviously, we have launched bought us a complementary product to search but.

We'll we'll be bringing.

You know LLM experiences more natively into search as well.

I do think you know first of all on.

We'll be rolling it out.

In our in our incremental way so that we can test iterate and innovate. So I think we'll approach it that way.

I think overall I think it can apply to a broad range of queries. So.

I think I'm excited that it can allow us to.

Better help users in a category of Aquarius, maybe in which there was no right answer and they're more creative etcetera. So I think those are the opportunities.

But even in our existing core categories.

Where we get a chance to do some heavy lifting for the users and use AI to better guide and guide them. You know I think you will see us exploring in those directions as well it's.

It's early days, but I think there's a lot of innovation to come on the cost side.

We have always a.

Cost of compute.

Compute has always been a concentration for us.

And if anything I think it's something we have done extensive experience over many many years and so for us. It's a nature of habit to constantly drive efficiencies in hardware software and models across our fleet and so this is not new if anything you know.

The the sharper the technology curve as we get excited by it because I think.

We have built world class capabilities, and taking that and then driving down cost sequentially and then deploying it at scale.

Across the world So I think.

I think we'll we'll take all that into account in terms of how we drive innovation here and and but I'm comfortable with how we approach it.

And in terms of Capex, we do now expect that total capex for the year for 2023 will be modestly higher than in 2022 and two.

I had to point out that we're expecting a step up in the second quarter and that will continue to increase throughout the year and as we discussed last quarter.

AI is a key component it underlies everything that we do and we're continuing to invest in support of AI support of our users advertisers.

And our cloud customers access or commenting on here and then as we talked about last quarter. The increase in Capex for the full year 2023 reflects the sizable increase in technical infrastructure investment.

And on the flip side at decline in office facilities relative to last year.

Thank you Bob.

Thank you. The next question comes from Eric Sheridan from Goldman Sachs. Please go ahead.

Thank you so much for taking the questions and hope everyone on the team as well maybe two if I could.

On cloud, obviously, one of the dominant themes and you touched upon it as this client optimization theme that's going on broadly in cloud computing can you give us a little bit more of your perspective on where we are in terms of the optimization theme broadly in cloud computing as a headwind to either revenue growth or backlog growth compared to the tail winds of broad.

Other long term consumption growth and possibly the contribution of the AI initiatives to cloud computing growth and then second on Youtube, obviously, you've seen a lot of success with respect to engagement and consumption on shorts can you give us an update on where we are on monetization trends in shorts compared to the consumption you've already seen in usage shifts.

Thank you so much.

So in terms of the cloud cloud.

Cloud question you know the point, we were trying to underscore is there's uncertainty in the economic environment and so we saw some headwind from the slower growth of consumption with customers really looking to optimize their costs given that macro climate leave the forecasting to you on that but that's sooner and I commented on.

Really pleased with the momentum that the team has been delivering in the breadth of what they've been working on.

I do think I would add that we are leaning into optimization. I mean, there is an important moment to help our customers and we take a long term view and so it's definitely an area. We are leaning in and trained to help customers.

You know make.

Make progress and better efficiencies better weekend Phillip.

Yes.

Shortsighted look shorts viewership is growing rapidly.

<unk> 50 billion plus daily views on their Q4 earnings call up from 30 billion last spring.

We're pleased with our continuing progress in monetization as I said earlier people are engaging and converting on the ads across shorts at increasing rates.

Closing the gap between short and long form is a top priority for us as is continuing to build a greater creator and user experience.

Ads on shorts are now available via video action App discovery and performance Mexican pains NVA product fleets.

Sure Charles a shopper Bowl.

We're the only destination, where creators can produce all forms of content across multiple formats on screen, some with multiple ways to make a living.

And as Sundar said last year as the number of channels that uploaded to Schwartz daily grew over 80% and then in February we brought revenue sharing to shorts via Youtube partner program or.

Our sustainable revenue sharing model at scale remains pretty unique in the industry and we continue to see strong greater adoption. So ultimately.

Golar to make Youtube the best place for Schwartz of Yours, and creators and that's really what we're focused on right now.

Yeah.

Thank you.

Thank you. The next question comes from Ross Sandler of Barclays. Please go ahead.

Hey, guys.

Question.

Sundar UK welcome the group.

Structured a lot of the Android partnerships from inception.

And.

And I believe and possibly the iOS agreement as well so how do you feel about alphabets ability to maintain the unit economics with these partnerships in light of.

Microsoft ambitions to increase its share of paid search.

Yeah.

Have any impact on your outlook for profitability of overall al forgot over the long term.

Uh huh.

You know.

Maybe I'll look I think the.

These dynamics are have always been around it's important to remember.

As far as I can remember we've always been in a competent of environment for these deals and while I can't comment on the specifics of any of our partnership agreements.

Served us well is always first of all building the best product possible focused on giving value to users.

And when we work with our partners, we work hard to create.

Creative win win.

Vitamin experience and ultimately partners end up choosing us.

Because that's what the users want and you know it's always been what's helped help search be widely distribute it. So I think it all starts with continuing to innovate and improve search and making sure. We are leading a leading there. So I think they've always approach it.

Very robustly over the many many years and I'm comfortable.

That will continue to be able to do so.

And then in terms of just longer term profitability I think I'd broaden out your question somewhat because the way. We're looking at it is we continue to be committed to investing for growth and we want to ensure we have overall capacity for growth and so we have a number of.

Work streams underway too as we keep describing it durably reengineer, our cost base and in particular, what we're excited about our long term opportunities with AI and want to make sure. We have the capacity to continue to invest there and the other areas, where we see long term growth in search and ads cloud E. Two.

Hardware and so that underscores our efforts to build in additional flexibility and as we have said repeatedly that we wanted to ensure that expense growth that's not growing out of revenue growth and that means driving revenue growth and really being as.

Disciplined as we can on these various work streams that we've discussed.

Earlier in this call and last quarter as well to improve our expense growth trajectory.

Thank you. The next question will come from Justin post of B a M. L. Please go ahead.

Great. Thanks, maybe one for Sundar one for Ruth Sorry, you got the cost question on on learning language models into search can you talk about revenues I think on one hand, youll see better relevancy, and maybe better results with higher conversion, but on the other hand, there might be fewer areas for ads or fewer queries because people get answers quickly.

Quickly are you optimistic on that transition and maybe give us your thoughts there and then Ruth backing out the one time charges. It looks like Opex growth is now 8%. So so real progress there could you give us a flavor of where you are you think in your optimization cycle. Thank you.

So first.

First of all throughout the years, we have you know we've gone through many many ships in search and ask you of all search I think we've always had a.

Strong grounded approach in terms of how we evolve ads as well.

And we do that in a way that makes sense and provide value to users.

You know it.

The fundamental drivers here are people are looking for relevant information in commercial categories. They fine adds to be.

Hi, Lee relevant and valuable and the and so that's what drives this virtuous cycle and I don't think the underpinnings of the fact that users want to 11 commercial information they want choice in what they look at even in areas, where we are summarizing and answering et cetera. It uses one choice.

We can about sending traffic advertisers want to reach users and so all of those dynamics I think you know, which have long served us well remain and as I said will be will be trading in testing as we go and I feel comfortable we'll be able to drive.

Driving innovation here like we've always done.

And in terms of our Opex trajectory, yes, there was the elevated expense in Opex from the $2 6 billion in severance and office space charges. There was also a $988 million benefit from lower depreciation due to the change in useful lives for that obviously is an ongoing.

Benefits them and there was also as we noted in our earnings release and benefit from the shift in timing of stock based compensation from the first quarter to the second quarter, So a little bit of complexity there, but at the core of your question. We remain extremely focused on these various work streams that we've talked about it starts with the pace of hiring it goes to the.

Various work streams that.

Sundar and I referenced around using AI and automation to improve productivity all that we're doing with suppliers and vendors to be as efficient as possible all that we're doing around optimizing how and where we work you've seen some of those announcements. This.

This quarter beyond the work work force reduction things that we're doing and for example office services and we're executing against each of these.

Various work streams. So our view is that there is more to do and as we tried to be clear where we are in execution mode. You'll see some of the benefit in 'twenty three you'll see more of it in 'twenty four and we're going to continue building against it beyond.

Great. Thank you.

Thank you. The next question comes from Michael Nathanson of Moffett Nathanson. Please go ahead.

I have one for <unk> one for Ruth.

We're trying to get under the Hood search advertising and trying to understand changes in demand between colors of good installs of services.

Looking at the service side as demand returned back to pre pandemic levels and then in terms of goods in E Commerce.

Have you seen a slowing of demand if you could help us.

Just level set us back in a pre pandemic levels.

I understand.

Services versus goods demand and then for Ruth on the terms of efficiency.

The diligent how does the significantly higher cost of capital impact the way you imagine that evaluated the other bets absence or anything there on maybe rethinking some of the other bets and what are you doing in changing some of the structures of the other best assets. Thanks.

It was a bit hard to hear you are breaking up so I think I'm going to start and address when I heard as a <unk>.

Second question as we're looking at higher cost of capital in this environment, what how does that affect the way. We're looking at other bets hopefully we heard you correctly. It was crackling Oh look I.

Think as we've talked about repeatedly as it relates to other bets.

Our focus is to use deep technology to drive innovation and we're very focused on the pace of investment and financial returns that it's been.

A consistent focus to generate attractive returns and I think the core operating.

Models and our long term operating models are going to be the most relevant as we're looking at the returns we can generate yes, absolutely I'm mindful of.

The higher cost of capital, but I think at its core we're looking at what's the what's.

What's the value creation and a return on those and as we indicated when.

When we went through the <unk> the.

The reduction in force, we similarly worked across the other bets and some of them as they are on a path to to ongoing growth. Yeah. We were moderating what is the expense trajectory there as we're looking at what's the overall return on invested capital and we're continuing to work on these to make sure that we're delivering value at <unk>.

It is an important one that is part of a broader question about the underlying operating assumptions.

Okay.

The first one yeah on the first part again it didn't come across quite clearly, but I hope I understood correctly and search revenues grew modestly year over year again, reflecting an increase in the retail and travel verticals.

Partially by a decline in finance and media entertainment. So excluding the impact of FX performance was actually similar to <unk>.

Last quarter, the ongoing performance of search notwithstanding the headwinds reflects really search resilience with the.

I'd say ability of search to surface demand and deliver measurable Orion and uncertain.

<unk>.

I called out the key verticals in the quarter, there's really no additional color on other verticals.

<unk>, maybe more broadly what we saw reflects what's being reported elsewhere and across the headlines. Many companies are very focused on shorter term profitability amidst this uncertainty and some pulled back our ads budgets as.

As well.

Yeah.

Okay. Thanks.

That's clear.

Thank you.

The next question comes from Mark Mahaney of Evercore. Please go ahead.

Okay can I try two questions. Please I think Philipp you talked about them kind of a more of a pull back in network AD revenue versus search and Youtube you have any thoughts on why that was the case and then Ruth.

Cloud business, even with the accounting change has shown this very steady March towards profitability you turned the corner now you've talked about growing the business for long term profitability, but are there any reasons why we wouldn't.

Why there shouldn't be sustainably profitable kind of starting from here as the business continues to scale.

Or could it be that that profitability could be wildly for a while before it's sustainably profitable that segment cloud. Thank you Yeah, why don't I just I'll take both of those so in network really it's a continuation of what we talked about last quarter. We saw the ongoing pullback in advertiser spend and you know I would contrast that last quarter, we talked about both.

Pullback and Youtube in network and we were pleased that we saw the stabilization in AD spend on a sequential basis in Q2, we still saw ongoing pullback in network, which tends to be a mix of businesses as you know well and then in terms of cloud I tried to make that clear in opening comments I think it's a really important question. We are very pleased with the Q1 result.

And is at the center and I noted we're.

Intensely focused on all elements of the cost space and the long term path to attractive profitability at the same time I think at the core of your question on what we were trying to convey is we will continue to invest to support long term growth in particular, given the opportunities, we see delivering AI capabilities to our customers.

So you know as I've said in the past you shouldn't extrapolate from quarter to quarter, but we are very pleased to be at this level and are continuing to focus on profitability and long term value creation here.

Okay. Thank you Ruth.

Thank you.

And our last question will come from Colin Sebastian from Baird. Please go ahead.

Great. Thank you.

Two for me as well I guess first sundar the consolidation of the AI teams I think you've talked about that helping to accelerate innovation.

I'm curious specifically with that consolidation what are the product milestones, we should look out for related to that.

And then Philip regarding your comments on retail spin.

Specifically on shopping and payments.

How should we think about that evolving across the platform. This year, maybe similarly, what are some milestones we should look out for.

That front. Thank you.

Thanks.

Quite excited.

By by bringing the two world class teams. So I think both both brain and deep mine.

Their collective accomplishments in AI over the last decade really set the stage for.

At this moment and so both both getting access to a pool talent.

So that they can work together in a coordinated way and definitely will help us pull our computational resources too which is going to be critical and will help us build the.

Core core product is obviously building more capable models safely and responsibly in doing it.

Doing it.

Taking into account all of the capabilities our customers need both on the consumer side on the cloud side and being able to iterate and getting that virtuous cycle going so you already.

I have seen is.

You know put out palm Apis, and we are incorporating palm across our products, but we'll continue that progress in and we'll keep you posted as we as we do.

So retail is an important vertical and driver for us and I called out the year over year increase in retail in search and other I also talked earlier about the macro climate and <unk>.

Established we can really drive value for our retailers even in challenging times are whether it's online offline. Both we are helping them drive their business goals meet customers.

Wherever they choose to shop, maybe a little more some key trends here are retailers are increasingly focused on maintaining margins and driving our eye right now.

<unk> broad match or key levers, providing a more incremental conversions.

While insides on vision, but bids and budgets are really helping retailers and identify opportunities for growth and efficiencies across our suite of products.

Taught at length on prior calls about omnichannel or local and Omnichannel solutions are helping bridge the gap here between online and offline.

By using AI to reach nearby shoppers promote local inventory fulfillment options are optimized in store visits and sales for example.

And then.

Really retain loyal customers and acquiring new ones, we have Youtube app deep linking and new customer acquisition goals and Pemex are helping here.

Making checkouts easy with tools like virtual cards on chrome is obviously.

Important so those are just some of the key points overall, we're giving retailers really the best I hope AI powered tools and solutions to maximize regional ROI and really create a seamless experience including.

Where possible.

On the payment side for their customers and this will continue to be.

Our focus here.

Yes.

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 second 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.

[music].

Okay.