Q2 2023 Alphabet Inc Earnings Call
Welcome everyone. Thank you for standing by for the alphabet second 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 the 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 second quarter 2023 earnings conference call with US today are Sundar Pichai Philipp Schindler Andrew's Brett.
Now I'll quickly cover the safe Harbor.
Some of the statements that we make today regarding our business operations and financial performance may be considered forward looking and such statements involve a number of risks and uncertainties that could cause actual results to differ materially.
For more information please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC.
During this call we will present, both GAAP and non-GAAP financial measures a reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at a B C Dot X Y Z forward Slash Investor Eric.
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 Hello, everyone. We are holding a call from London today, It's an important hub for us and I'm excited to spend time with our local teams, including Google Deep mine as well as leaders and partners from across the region.
This quarter, we showed great progress at Au brand cast and Google marketing live and.
And we're looking forward to cloud next in August the.
The momentum across the company drove our results this quarter.
We delivered solid performance in search and Youtube and ongoing strong growth in cloud.
We remain focused on long term value creation.
And we continue our important work to operate more efficiently, creating durable savings to fund investments in our biggest priorities.
Today I'll talk about this momentum, including our continued leadership in AI and our excitement about the evolution of search.
I O. We shared how we are making AI helpful for everyone in four important ways.
First improving knowledge and learning.
This is our seventh year as an AI first company and we intuitively know how to incorporate AI into our product.
Large language models make them, even more helpful models like bomb too and soon Gemini, which we are building to be multimodal.
These advances provided an opportunity to re imagine many of our products, including our most important product search.
We are in a period of incredible innovation for search which has continuously evolved over the years.
This quarter saw our next major evolution with the launch of the search generated experience our S. G, which uses the power of generator of AI to make search even more natural and intuitive.
User feedback has been very positive so far.
It can better answered Aquarius people come to us with today, while also unlocking entirely new types of questions that search can answer.
For example, we found that generated way I can connect the dots for people as they explore a topic or project.
Helping them be multiple factors and personal preferences before making a purchase or booking a trip.
We see this new experiences onto the jumping off point for exploring the web enabling users to go deeper to learn about a topic.
I'm proud of the engineering excellence underlying our progress.
They may launch be boosted serving efficiency, where do you think the time it takes to generate AI snapshots by half.
We'll deliver even faster responses overtime.
We are engaging with a broader ecosystem and we'll continue to prioritize approaches that send valuable traffic and support a healthy open back.
Ads will continue to play an important role in this new search experience.
Many of these new queries are inherently commercial in nature.
We have more than 20 years of experience serving ads relevant to use this commercial queries and S. G enhances our ability to do this even better.
We are testing and evolving placements and formats, and giving advertisers twos to take advantage of generative AI.
Philip will talk more about how we are using generative AI in our ads products to better serve both advertisers and users.
Second we are helping people use AI to boost their creativity and productivity.
One example is board our experiment in conversational AI.
Since launching in March it continues to get better.
We rolled out a number of exciting features and capabilities earlier this month.
<unk> is now available in most of the world in over 40 of the most widely spoken languages.
We also added Google lens capability. So you can take an image and ask all kinds of questions.
Turning it into cold and more this new feature has been really popular and it's been great to see people sharing their experiences.
Bart can now read its responses allowed and you cannot just them for tone and style.
We continue to see great interest in using bought for quoting task.
On productivity earlier this year, we introduced do what they are in both Google cloud and workspace.
People collaborate with AI to code right and get better insights from data and more.
Today more than 750000 workspace users have access to the new features in PB.
Third we are making it easier for others to innovate using AI.
One way is by providing Google clouds high performance infrastructure optimized for a range of generate of AI models.
It's being used by thousands of customers and partners to transform their businesses.
I'll give an update on the cloud business in just a moment.
Finally, we are making sure we develop and deploy AI technology irresponsibly.
So that everyone can benefit.
Last week, we signed onto joint commitments with other leading AI companies at the White House.
Building on the principles that have guided our work for many years.
To take advantage of the AI opportunities ahead, we've been sharpening our focus as a company <unk>.
Investing responsibly with great discipline, and finding areas, where we can operate more cost effectively.
We've made good progress in data center machine efficiency, which will pay dividends as we continue to invest in AI.
We continue to slow our expense growth and base of hiring and ensure our teams that are aligned to our highest priorities.
This quarter, we relocated a number of teams, including aligning raises AD sales with our existing business organization.
We are combining various engineering efforts across core infrastructure and cloud.
Products like BARDA and S. G are being built by small fast moving teams that are being reallocated to these high priority efforts.
Overall, we are actively moving people to higher priority activities within the company.
And we continued to optimize our real estate footprint for current and future needs.
Next Google cloud.
We see continued growth with Q2 revenue of $8 billion up 28% and operating profit of $395 million.
Our AI optimized infrastructure is the leading platform for training and serving generative AI models.
More than 70% of Gen AI unicorns are Google cloud customers.
Including cohere, Jasper typeface and many more.
They provide the widest choice of AI supercomputer options with Google Gpus, and advanced Nvidia Gpus, and recently launched new eight III AI supercomputers powered by Nvidia is at 100.
This enables customers like Apple oven to achieve nearly two times better price performance than industry automated.
Our neogen ready way I offerings are expanding our total addressable market and winning new customers.
We are seeing strong demand for the more than 80 models, including third party and popular open source in our verdicts search and conversational AI platforms with the number of customers growing more than 50 next from April to June .
Among them Priceline is improving trip planning capabilities.
Car forest, creating full marketing campaigns in a matter of minutes.
And cap Gemini is building hundreds of use cases to streamline.
Time consuming business processes.
Our new anti money laundering, AI helps banks like HSBC identify financial crime risks are.
And our new AI powered target and lead identification suite is being applied at suitable to help enable drug discovery.
Our generative AI capabilities also gave us an opportunity to win new customers and upsell into our installed base of 9 million paying Google workspace customers.
I mentioned do what they I earlier in Stoke artist using it to improve customer service workflows.
And companies like Exxon are scaling sales outreach and optimizing customer service.
Customers confidently choose workspace because of the safety and security be provider of distributed Workforces.
Our AI capabilities are helping us differentiate core products like cyber security.
We have integrated AI throughout our portfolio of winning organizations like Pfizer, who are using Google cloud transform their security operations.
Chronicle security operations suite, but Mandy and fully integrated is helping customers stay protected at every stage of the security lifecycle.
In the first half of 'twenty to 'twenty three we saw a 35% increase in incident response engagements compared.
Compared to the same period last year.
Finally, our AI capabilities are also expanding our partner ecosystem.
With hundreds of Isps and SaaS providers, such as box, Salesforce, and snorkel and the world's largest consulting firms like Accenture and Deloitte.
They are collectively committed to train more than 150000 people on Google cloud generate of AI.
Turning next to Youtube earlier this year, we shared that revenues across Youtube products were nearly 40 billion for the 12 months ending in March.
I'm really pleased with how Youtube is growing audiences and driving increased engagement.
Deep shots are now watched by over 2 billion logged in users every month up from 1.5 billion just one year ago.
Living room remainder fastest growing screen in 2022.
In terms of watch time.
We are reaching more than 150 million people on connected TV screens in the U S and seeing growth and momentum internationally.
And on subscriptions Theres good growth late last year, we announced over 80 million Youtube music and premium subscribers.
Sign ups for NFL Sunday ticket kicked off in April and we look forward to hosting our first football season on Youtube. This fall.
Finally hardware and Android picked.
Picks up continues to have strong sales momentum, we introduced new pixel devices that io, including pixel for pixel tablet and pixel 70, and we've had a great response.
Android 14, our latest doors will incorporate our advances in generative AI to Personalise Android phones.
The pixel and Android teams are working together to advance the latest devices.
Pixel phone it is a great example, but it's many hardware and software innovations.
Before I close you may have seen that we just announced some exciting news that drip is taking on the important new role of President and Chief investment Officer.
As our longest serving CFO . She has helped guide the company through an amazing period of growth a global pandemic and the ongoing economic uncertainty that is followed.
I'm excited to continue to work with throat, who will lead our 'twenty 'twenty four planning and remain as CFO why do we do a full search for a successor.
It's business as usual now and no change in approach for the future.
I look forward to seeing the impact routes will have in her new role driving our investments engaging with our stakeholders and creating opportunities for people and communities everywhere.
To close I'm energized by the pace of innovation and the momentum across the company.
15 products that each serve a half a billion people and fix that so over 2 billion. Each we have so many opportunities to deliver on our mission.
<unk> to our employees around the world for the great work this quarter over to you for them.
Thanks, Sundar and Hello, everyone happy to be here with you all today.
Let's jump right into our performance for the quarter.
Google services revenues of 66 billion were up 5% year on year.
In Google advertising search and other revenues grew 5% year on year led by solid growth of the retail vertical.
And Youtube ads revenues were up 4% year on year driven by growth in brand followed by direct response, reflecting further stabilization in advertiser spend.
At work revenues declined 5% year on year.
Google other revenues were up 24% year on year led by strong growth in Youtube subscriptions revenues.
Let's now take a few minutes to cover our three key priority areas, Google AI retail and Youtube, which I've laid out in prior quarters as clear opportunities for long term advertising growth.
I'll, then turn it over to Ruth for more details on our financial performance.
Q2 was a big quarter for Google AI, and our ads products I O G M L and brand cast or Testament to our deep commitment to building cutting edge tools and solutions that help businesses navigate complexity in real time and deliver the results they need.
All while improving the experience for users.
Sundar covered some of these innovations I'll share more.
It's worth reiterating that well generate if AI is no supercharging, new and existing ads products with tons of potential ahead AI has been at the core of our ads business for years in fact today nearly 80% of advertisers already use at least one AI powered search ads product.
Our approach to your I N adds remains grounded in understanding what drives real value for businesses right now and whats most helpful for users.
Advertisers tell us they're looking for a more specific experience to get set up with us faster. So at G. M. L. We launched a new conversational experience and Google ads powered by a L. L M. Two and specifically from our data to make campaign construction easier than ever.
Advertisers also tell us they want help creating high quality ads that work in an instant so we're rolling out the revamped asset creation flow and performance Max that helps customers adapt and scale their most successful creative concepts and a few clicks.
And there's even more with Pemex, we launched a new acid insights and new search term insights that improve campaign performance understanding and new customer lifecycle goals that let advertisers optimize for new and existing customers while maximizing sales.
We've long said, it's all about reaching the right customer with the right creative at the right time.
So later this year automatically created assets, which are already generating headlines and descriptions for search ads will start using generative AI to create assets that are even more relevant to customer of course.
Broad match also got updates AI based keyword prioritization insurance, the right keyword bid budget creative and lending pages chosen when there are multiple overlapping keywords eligible.
And then to make it easier for advertisers to optimize visual storytelling and drive consideration and the mid funnel. We're launching two new AI powered AD solutions demand Gen and video view campaigns and both will include shorts inventory.
Sundar talked earlier about S G and our early experiments with new AD formats. We're in active conversations with advertisers publishers and partners to get their input on how to make these solutions work best for them and are excited to test and evolve this experience as we learn more.
Let's pivot to retail where we had a good quarter.
The ability remains a top theme for retailers so solutions like P. Max that drive bottom line value continued to do well.
We also continue to see success in helping businesses unlock efficient growth and deliver on their omni channel goals take.
Take ace hardware, who tapped into AI powered search and omni bidding to capture increased seasonal demand leading up to memorial day.
This drove increases across online sales store visits and in store sales.
Resulting in 87% year over year growth in omni revenue from Google ads and led to one of the largest revenue ever for a store owners.
Q2 also brought innovation on the consumer and merchant front.
We've rolled out a new journey I pod virtual try on tool that brings the fitting room experience online shop.
Shoppers can try on women's tops across a wide array of models from brands like Anthropologie ever Lane H N M and loft.
Rich visual engaging content is a win win for both consumers and merchants.
In fact product office with more than one image see a 76% average increase in impressions and a 32% increase in clicks.
Our new product studio use Gen AI to help retailers create tailored eye catching imagery for free and we're working towards optimizing for performance.
We think this will be a game changer, especially for Smbs, who can now create high quality images to use both across Google and their own sites without spending a lot of time or money.
As we continue to make Google a valuable place for merchants to grow their businesses and connect with users merchants Center next is another win we've seen two X growth in the number of businesses using merchant center in the past two years and were no simplifying it by automating inventory management, and giving a consolidated view of performance insights.
Tools means better growth for merchants and better experiences for users.
Moving to Youtube.
<unk> said it before I'll say it again Youtube starts with our creators and it's their success in our multi format strategy that will drive youtube's long term growth.
In prior quarters I've laid out how we think about this enabling our creators to make a living on our platform with more formats and awesome tools leads to more content, which leads to quality consumption of video content and another big focus of the team and this leads to better opportunities for monetization and for advertisers to support this incredible ecosystem.
As we think about growth, we're focused on shorts connected TV and our subscription offerings all of which grew nicely this quarter let.
Let me double click into shorts and CTV.
First shorts momentum remains strong watch time and monetization are moving in the right direction.
Last year, we introduced ads on shorts to help drive performance and direct response campaigns via video action performance, Max and App campaigns.
As of Q2 brand advertisers can start testing shorts ads and awareness campaigns, it's still early days, but we're excited by the results.
<unk> the more Pacific's number one premium skincare brand was an early adopter.
It leaned into video reach campaigns and new creative over 10 day test to drive a 21% increase in unique users reached from shorts and in feed all the more efficient CPM.
Second connected TV.
Substantial engagement by viewers and our ROI for advertisers is driving monetization of the living room. We are very pleased with the growth we've seen and how we're delivering the reach results and relevance that businesses are looking for at scale.
At brand cast, we announced two new AD offerings for streaming.
First 30 seconds on Skippable ads are coming to Youtube select which is lending 70% plus of impressions on the television screen.
32nd ads or a TV industry staple in Youtube is bringing our advanced audience capabilities and unparalleled reach to the format.
We're also exploring new pause experiences some brands can drive awareness or action when you hit pause.
Looking at Youtube Holistically, According to our measurement partners Nielsen trends Union, and Ipsos, MMA Youtube delivers higher alright, and TV and other online video on average.
Take the Hershey company as part of a multi year partnership to optimize its Youtube strategy Hershey spreads have been tapping into CTV efficient AI powered formats and made full platform creative leading to Youtube, becoming its number one alright, driving media partner, producing a 65% plus increase in <unk> from 2018.
<unk> to 'twenty to 'twenty three.
One last highlight that bridges the power of Youtube with our continued efforts to bring the best across Google to our partners.
With Warner Brothers Discovery, we expanded our multi year relationship across our entire Android ecosystem, including partnering on the launch of Max the deepened mutually beneficial relationship on Google TV and plans to work together unused surfaces.
Youtube's expanded deal for Max inclusive of a Max NFL Sunday ticket bundle on Youtube TV also underscores our joint commitment to bring the highest quality content and experiences to our customers.
I'll close by echoing Sundar with a huge thank you to googlers everywhere for their incredible passion and hard work and to our customers and partners for their continued collaboration and trust.
Over to you.
Thank you Phillip before I go into the results first Sundar. Thank you very much for the opportunity I'm very excited about the new role and I look forward to it.
Now turning to the results, we're very pleased with our financial results for the second quarter, which reflect an acceleration of growth in search and then Tim in cloud My comments will be on year over year comparisons for the second quarter, unless I state otherwise I will start with results at the alphabet level, followed by segment results and conclude with our outlook.
For the.
Second quarter, our consolidated revenues were $74 6 billion up 7% or up 9% in constant currency.
Search remained the largest contributor to revenue growth.
Total cost of revenues was $31 9 billion up 6% driven by other cost of revenues of $19 4 billion, which was up 8%.
Growth here was driven by content acquisition costs, primarily for Youtube subscription offerings, followed by hardware costs associated with pixel family launches in the second quarter.
As noted in our earnings release, the overall increase in data center and other operations costs was partially offset by a reduction in depreciation expense due to the change in estimated useful lives we discussed last quarter.
Operating expenses were $20 9 billion up 4%.
Operating income was $21 8 billion up 12% and our operating margin was 29% I will cover our expense and margin performance and our outlook.
Other income and expense was 65 million net income was $18 4 billion, we delivered free cash flow of $21 8 billion in the second quarter and 71 billion for the trailing 12 months, reflecting improved operating performance as well as the deferral of certain tax payments to the fourth.
<unk> of 2023 as noted in our earnings release, we ended the quarter with $118 billion in cash and marketable securities.
Turning to our segment results prior period results have been recast for two changes that we made as of the first quarter first deep mind is now reported as part of the Alpha that's unallocated corporate costs second we updated our cost allocation methodologies.
In the second quarter. We then combine the brain team from Google Research with deep mind to form Google Deep mine costs associated with the brain team, which were previously included in Google Services are now reported as part of the Alpha that's unallocated corporate costs, we have not recast prior period results.
To reflect this additional change.
Within Google services revenues were $66 3 billion up 5%, Google search and other advertising revenues of $42 6 billion in the quarter were up 5% led by growth in retail.
Youtube advertising revenues of $7 7 billion were up 4% driven by brand advertising followed by direct response, reflecting further stabilization in spending by advertisers.
Network advertising revenues of 7.9 billion were down 5%.
Other revenues were $8 1 billion up 24%, reflecting growth in Youtube non advertising revenues, primarily from subscription growth in Youtube music premium and Youtube TV, followed by growth in hardware revenues, primarily driven by the launch of the pixel seven eight in the second quarter.
Finally play returned to positive growth in the second quarter.
TAC was $12 5 billion up 3% Google services operating income was $23 5 billion up 8% and the operating margin was 35%.
Turning to the Google Cloud segment revenues were 8 billion for the quarter up 28% G. C. P revenue growth remained strong across geographies industries and products that being said, we saw continued moderation in the rate of consumption growth as consumers optimize their spend Google workspace.
Strong revenue growth was driven by increases in both seats and average revenue per seat.
<unk> cloud had operating income of $395 million and the operating margin was 5%.
As to our other bets for the second quarter revenues were $285 million and the operating loss was $813 million. The decrease in operating loss was primarily driven by a reduction in valuation based compensation liabilities related to certain other bets.
Turning to our outlook for the business with respect to Google services first within advertising.
We were pleased with the acceleration of search advertising revenue growth in the second quarter. Our continued ability to generate sustained growth reflects our unparalleled engineering innovation that creates extraordinary experiences for users and capabilities for advertisers and delivered with the deep expertise of our go to market team.
And in Youtube, we saw ongoing signs of stabilization in advertiser spending we are prioritizing product focus on increasing quality consumption of video content with those short and in the living room, which is translating into improved monetization.
Second within other revenues and our Youtube subscription products the sustained strong growth in revenues reflects significant subscriber growth.
You may have seen that last week, we increased subscription prices for Youtube music and premium, which underscores the value of the products.
Strong year on year growth in hardware revenues was due in large part to a timing change given the pixel <unk> was launched in the second quarter, whereas the pixel six eight launch occurred in the third quarter last year. Looking ahead. The launch timing change will be a headwind to hardware revenue growth in the third.
Third quarter <unk>.
Play returned to positive growth in the second quarter, driven primarily by a solid increase in the number of buyers.
Turning to Google Cloud, we are particularly excited about the customer interest in our a I optimized infrastructure are large language models, our AI platform services and our new generative AI offerings, such as do at AI for Google Workspace, Although we are still clearly in the early days.
At the same time, we continued to experience headwinds in the second quarter for moderation in consumption growth as customers optimize their spend we continue to invest aggressively while remaining focused on profitable growth.
In terms of expenses and profitability, we remain very focused and durably reengineering our cost base. Most evident today are the actions we have taken to reduce the pace of head count growth, including the workforce reductions, we announced in the first quarter and a slower pace of organic hiring and par.
Given our focus on reallocating talent from within to fuel our growth priorities.
A quick comment on the sequential improvement in operating margins in the second quarter. There are two factors to note first the benefit from an acceleration in search advertising revenue growth in the second quarter.
Second the vast majority of the charges related to our workforce reduction and optimization of our global office space were taken in Q1.
Finally, as it relates to Capex in Q2, the largest component was for servers, which included a meaningful increase in our investments in AI compute.
The sequential step up in the second quarter was slower than anticipated for two reasons first with respect to office facilities. We continue to moderate the pace, that's fit outs and ground up construction to reflect the slower expected pace of head count growth.
Second there were delays in certain datacenter construction projects, we expect elevated levels of investment in our technical infrastructure, increasing through the back half of 2023 and continuing to grow in 2024. The primary driver is to support the opportunities we see in AI across.
South of that including investments in G. P is and proprietary T. P is as well as data center capacity.
With all that said, we remain committed to Durably reengineering, our cost base in order to help create capacity for these investments in support of long term sustainable financial value.
Thank you Sundar, Philip and I will now take your questions.
Thank you as a 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.
Our first question comes from Brian Nowak of.
Morgan Stanley . Please go ahead.
Thanks for taking my questions I have two.
Two the first one for Sundar and I'd be curious.
Learn about some of your early learnings and surprises around consumer behavior on how people are using bard versus search and what new behaviors are consumer utility are you. Most excited about as you think about what Jim and I could provide for people over the course of the next year or so.
And then the second one for Ruth.
Congrats on the new position.
One question is about the durable expense comments I think last quarter, you talked about the idea that expenses grow slower than revenue in 2024 is that still the right way to think about it and just to confirm does that include the impact of depreciation in those comments.
Thanks, Brian I'll take the first part.
You know it's definitely early days.
But both across board and search and native experience.
You know the feedback has been very positive from our users.
I think you know.
We are definitely now are able to serve.
You know I would say deeper and broader information use cases.
Which is very exciting.
Matt you know I wouldn't say surprise. So for example people really use them.
Okay.
Okay.
Okay.
Yes.
Okay.
No.
Yeah.
Alright.
We have known how how big Google lens can be B C that individual's searches.
We get and how much it has grown over the last two years since we've been doing this for a while.
Definitely not in BARDA has been Super well received so which gives me a sense that as a given Gemini is being built from the ground up to be multimodal I think that's an area that's going to excite users and I go back many years ago. When we did universal search whenever for users we can abstract different content types.
And put them in a seamless way they tend to receive it well and so I'm definitely excited about what's ahead.
And on your second question Brian .
We are really pleased with the operating performance in the second quarter, we've been saying for some time that we are focused on revenue growth ahead of expense growth and achieved that for the first time in some time and that is cost of sales plus operating expense overall and we do remain very focused on durably reengineering our.
They serve a lot of stream work streams that are in flight and they mentioned a couple of them in opening comments. This remains a major priority as Sundar and I both commented on.
Great. Thank you both.
Thank you. The next question comes from Eric Sheridan of Goldman Sachs. Please go ahead.
Thank you so much for taking the questions maybe one for Sundar I don't want also for Ruth.
So Dara can you talk a little bit about elements of open source versus closed and in things like custom silicon and how you're thinking about AI offerings broadly developing over the next couple of years and what do you see as some of the key differentiation points.
Google either through their cloud business or the consumer offerings are going to bring to market and how we should think about differentiation playing out to a greater degree in AI in the years ahead there'll be number one and then Ruth I'll Echo Brian's congrats as well on the new role maybe both of you could talk to why this type of role might be important at this point in time.
For alphabet, and I agree with what you're looking to sort of drive into.
The organization from this new role as you move into it in the fall.
Thanks, Eric on the first part.
So big topic.
You know I would broadly say that.
The investments for AI.
You look at the type of deep computer science for the talent, we have worked hard to bring to the company.
And from the ground up the infrastructure to be built from the earliest days Google has been a company you've.
We've thought about the switches in our data centers matter, whether it be think we can.
Do the best and get a get an advantage by by innovating, our we've chosen to do so.
We have done that on a eye on the on the silicon side.
But what's important to us is really stay focused on our users and customers and support all the innovation that's needed. So for example, the cloud we've been we've really embraced open architecture.
B embrace customers wanting to be multi cloud.
And it makes sense for them. So similarly, you would see what the AI we will embrace.
Law for not just our first party models will all for third party models, including open source models I think open source has a critical role to play in this ecosystem.
Google contributes well one of the largest contributors to if you. If you look at hugging phase and in terms of the.
Contribution there when you look at projects like Android chromium and so on kubernetes and so on so we'll embrace that and we will stay at the cutting edge of technology, and I think I I think that'll serve us well for the long term.
On the second part of your question first of all.
Very grateful and thankful to all the work that is done for the company, it's too invaluable to capture them in birds eye Super thrilled that she is going to continue on and impactful new rule and.
The scale of our company with the broad changes in technology, I think it's more important than ever before to engage on these issues globally at scale.
And and advocate on the economic opportunity of the investments, we made across alphabet and Google.
And I am glad that she's going to continue as CFO and so no changes there and we will take the time to find the successor and Roop will be closely involved.
Not just on that but also our long range planning, including 24, but anything that and just to underscore when you asked the point about impact one of the places Sundar and I have discussed quite a bit is landing well into 'twenty 'twenty four capital plan in the multi year plan in completing all of the very important efforts we have underway.
We're excited about what they mean setting the company up allowed to be able to invest for long term growth and so we're continuing to execute against US and then I think sundar a summarized it well we see technology can make such a difference in the lives of so many and as long as the economies and to be able to focus on the impact on economic growth and the opportunity for people.
For organizations for countries and he gets a privilege I'm really excited about it and particular with this amazing company and so focusing there as well as the investments that we make across alphabet to drive economic growth globally across numerous sectors.
Great. Thank you.
Thank you.
The next question comes from Doug Anmuth of Jpmorgan. Please go ahead.
Thanks for taking the questions one for Sundar, one for Ruth Sundar I'm, just curious how do you think about timing for more broadly integrating generative AI into search and more specifically what are some of the things you would need to see to do that and then Ruth just on Capex, the <unk> capex lower than expected as you explained.
Do you still expect modestly higher capex in 'twenty three versus 22, and then I know, it's getting a little bit ahead, but how should we think about kind of timing of that real estate and office optimization efforts through 'twenty three and then also into 'twenty four.
Look on the surgeon native experience you know we.
We definitely.
Wanted to make sure.
We are thinking deeply from first principles are wildly exciting new technology, if constantly been bringing in a you know AI innovations into search for the past few years and this is the next step in that journey.
But you know it is a big change so we thought about it.
From first principles.
It really gives us a chance to now not always be constrained in the research was working before allowed us to think outside the box and you know I see that play out in the experience.
So I would say you know we are ahead of where I thought we'd be at this point in time.
Back and it's been very positive, we've just imprudent efficiency pretty dramatically since the product launched the latency has improved significantly.
We are keeping a very high bar and but I would say we are I had them all the metrics.
In terms of how we look at it internally and so couldn't be more pleased with it and so you will you will see us continue to.
Bring it to more and more users and over time. This will just be how search works and so while it's a you know we are taking deliberate steps. We are building. The next major evolution in search and I'm pleased with how it's going so far.
In terms of Capex I tried to lay out sort of the cadence of Capex and the point, that's an important one that the sequential step up in the second quarter was lower than anticipated for the two reasons I noted one of the work that we're doing around office facilities and then the delays in certain datacenter construction projects and that's why we.
Wanted to be really clear that we do expect elevated levels of investment in our technical infrastructure and that would be increasing through the back half of 2023 consistent with the comments. We've made previously that we expected 2023 to be higher and given that sort of start at the front half of the year and then continuing to grow into 2020.
For and the primary driver of this as you know well as to support the opportunities we see in AI across the company, including the investments that we've already talked about proprietary T. P is all that we're doing with T. P is as well as data center capacity.
And as we continue to see the pace of innovation.
Accelerate we just want to make sure we're positioned to address the opportunity across alphabet and T. Here. The other part of your question. When we look at real estate optimization, that's one of many work streams.
That are important when we talk about Durably reengineering, our cost base to create capacity for investments and support long term.
Sustainable financial value and we're continuing to work against that.
Thank you both.
Thank you.
The next question comes from Lloyd Walmsley of UBS. Please go ahead.
Thanks, a lot for taking the question I wanted to just follow up on the some of the <unk> questions and just get a sense I know, it's early but what are you seeing in terms of monetization and how do you guys think about that as you scale up the deployment of S. T E.
I think theres a lot of concern out there that that maybe in the short term, it's a bit of a headwind but over the longer term, maybe maybe query growth from a more useful product can kind of kind of make up for that but how do you guys.
See that playing out.
What can you share there.
Yeah.
The maybe I can give some color here.
We've obviously been focused on.
Bringing the sixteens and making sure it works well for users and it's very clear to me first of all as I use it myself that I said inquiries for which the answers are so so significantly better.
Clear quality win and so I think we are.
Definitely headed in the right direction and then we can see it in our metrics and the feedback we're getting from our users as well.
And the thing that doesn't change with these experiences is that many of you know.
You know a lot of user journeys have commercial in nature.
That I didn't hear in commercial user needs and what's exciting to me is that S. G gives us an opportunity to serve those needs again better right than better. So it's clearly an exciting area and as part of that.
The fundamentals don't change and it uses of commercial needs and they are looking for choices and there are merchants and advertisers looking to provide those choices. So those fundamentals are true in S. E T as well and you know we have a number of experiments in flight, including ads and we are pleased with the ability to sell sphere.
And so.
We will continue to have all the experience, but I'm comfortable with what we're seeing and we gave a lot of experience working through these transitions and we'll bring all of those learnings here as well.
Yeah.
Alright, thank you.
Thank you. The next question comes from Justin Post of Bank of America. Please go ahead.
Great. Thank you just asked about the cloud it really looks like revenue growth stabilized. Despite optimization. So could you talk about the pipeline and the client wins in the quarter. How you felt about those and then any uptick are you seeing related to AI spending in the total revenues. This.
A quarter or in the second half thank you.
Thanks, Justin Oh.
It is an exciting moment overall in cloud because that is definitely.
A lot of interest from customers on on AI and.
And they definitely are engaging in many more conversations with Pos.
So you know I would say you know.
Without commenting on the short term, but you know when I think about it long term in my view the AI opportunity is.
Spanning our total addressable market and allows us to win new customers.
You know the scale of a scale of it.
Investments that we can vertically bring to cloud now.
As I said earlier or 80 models across vertex enterprise search and conversational AI and <unk>.
Taking all of them translating it into deep industry solution. So I'm excited about it.
Second it gives us an opportunity to upsell and cross sell into our install base. So for example, if you think about do what they are in Google Workspace now, it's a collection of all our agenda debate I pod collaboration.
<unk> features.
We can bring it to make it available to more than 9 million paying Google work workspace customers. Similarly, do a day I and glue plowed again allows us to.
Go back to our install base and engage in deeper conversations.
Finally, I think AI helps us differentiate our core products are for example, if you take a look at cyber security, we are deeply incorporating AI due to drive profound changes there. So overall I'm excited I'm excited and I view this as a long term opportunity and all the investments we are doing it.
AI.
Across alphabet, including you know.
The work, we're doing in Google defining Gould research on Gemini and so on our directly applicable to cloud as well so excited about it.
Great. Thank you maybe one follow up for Ruth did the infrastructure cloud grow faster than Workspaces again this quarter.
And so we we did I don't think we we commented on that and yes in the second quarter D. C. P growth was above the.
The growth rate for cloud overall.
Great. Thank you.
Thank you. The next question comes from Michael Nathanson of Moffett Nathanson. Please go ahead.
Thanks, I want to pick up one for Sundar.
We're talking about the AD market. If you step back you are seeing real signs now of weakness.
Linear TV AD agencies smaller digital companies are all slowing <unk>.
Macro backdrops nothing cloudy yet you guys are accelerating your growth this quarter. What factors are you looking at do you see that would.
I'll identify why are you growing while others are really struggling and slowing down and then Sundar I think we spent over $100 billion on R&D over the past five years.
And yet there's a narrative that it's so competitive and store expansion to compete going forward.
Talk a bit about how you're revisiting that R&D spend.
Near term cadence updates you can give us for growth and any factors that can change the girl Coke going forward for research and development spending for you guys. Thanks.
Yeah.
Maybe I can comment on the Oh, how do we think about R&D and.
If anything I think.
Two things we are always committed to driving deep computer science, our research and innovation, that's the foundation on which the company has built in.
Taking that and applying it in building new products and services and generating value is the virtuous cycle and you said nothing changes in that fundamental thesis.
We are definitely you know boat.
As Rick mentioned on AI investments, we are going to be committed to making sure we investory lifestyle opportunity.
But all the work we're doing on efficiency and optimization a place too on the AI side as well and so we're bringing all of that land. There. So it would be do this responsibly.
But no overall changes in our philosophy, our approach there and maybe I'll, let philipp comment on the overall market dynamics, yes.
Yes look I can't comment on others, but our focus continues obviously to be helping customers through whatever uncertainty or complexity they are facing.
A lot of companies are focused on profitability driving efficiencies and they were carefully evaluating the effectiveness of their budgets.
And our goal is really to help them maximize efficiency and drugstore or I and I think we have the proven AI powered tools and solutions.
To actually do it I called out search and other revenues being led by solid growth in our retail vertical.
We talked about.
<unk> and brand side on the Youtube side.
I think those are the key points I would make.
Thank you.
Thank you. The next question comes from Ken Gabriele.
<unk> of Wells Fargo. Please go ahead.
Yes. Thank you so much for the opportunity I appreciate that.
Can I ask on the on our performance.
Performance Max you've had great success, there could you talk about any vertical or use case expansions and how long until we possibly get.
To the point of more automated AI generated creative and production.
Yeah.
Yeah look this is this is a great question.
Ah is a foundational component that really allows us to help users advertise those pumps partners at scale.
And we spent on journey for years right to take the key components of advertising, whether it's bidding targeting and creative as well as innovation frankly in the core advertiser and publisher experiences and improve them dramatically through.
AI and performance Max is an example of how all this comes together at scale for advertisers they provide us with a business goal that set of assets and we can then take care of the rest to meet consumer demand and really deliver on the advertiser.
And as you heard at G M L.
Seen over many quarters, we've continued to build new AI features really.
On top of this.
I think I talked a bit in my prepared remarks about where we're taking some of our products from a gen. AI perspective, and if you take a look at some of the things we announced or it's fair to say, whether you look at Oh revamped asset creation fluent performance Max whether you look at automatically created assets, whether you look at <unk>.
<unk> studio and so on.
We're on the right path to deliver some really exciting new innovation in automated let me call it asset creation in the broader sense.
Yeah.
Okay.
Thank you.
Thank you our last question comes from Mark Mahaney of Evercore. Please go ahead.
Okay.
Ill follow up on that last question Philip.
You pointed out AI has been used to improve the advertising mouse trap.
Google for many years do you view generative AI as just a material accelerant of your ability to return to improve return on AD spend for the millions of marketers, who use Google and if you think about where generative AI would have the most impact could you could you could you peel it apart what's your guests now over the next couple of years, where it's going to have the.
Most impact on the creative on the audience creation on the at the campaign optimization, where do you think the most impact will come from general debate I just for all the <unk>.
Your advertising customers. Thanks.
Look as I said earlier general rate of AI is supercharging, new and existing ads products with really tons of potential ahead, and then we're really helping advertisers make better decisions solve problems enhance creativity and I covered this earlier.
For example, we launched a new conversational experience and Google ads as accretion flow and Pemex I mentioned, you automatically created assets the product studio.
On when I talk to customers. They are very excited about AI and understandably have some questions are one of the top questions. As for example, what's the next best step I should take and.
This is a key reason why we launched our Google ads I AI Essentials, which was a big announcement of GMO. It's a check lift of simple steps customers can take right now to unlock the power of AI and has to do with a foundation of data measurement. It has to do with taking action with our AI powered product and it really is a mindset shift to set up.
Organizations for AI success. So those are just some of the examples if you extrapolate those going forward. Those are some of the examples where I see a lot of upside apart from the points that I already mentioned and I think all of this before we have a multimodal capabilities really are in the mix and so.
Looking at the early innovations there I think it's going to be an exciting couple of years ahead. Thanks Mark.
Thank you Sundar. Thank you Phil Congratulations Ruth.
Thank you.
Uh huh.
And that concludes our question and answer session for today.
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 third quarter 2023 call.
And have a good evening.
Thank you everyone. This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yes.
Yes.
Yeah.
Yeah.
Okay.
Yeah.
Yeah.
[music].
Okay.