Q2 2024 Alphabet Inc Earnings Call

Operator: Welcome, everyone. Thank you for standing by for the Alphabet second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode.

Speaker Change: Welcome everyone. Thank you for standing by for the Alphabet 2nd Quarter 2024 Earnings Conference Call.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 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.

Speaker Change: At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

Speaker Change: To ask a question during the session you will need to press star 1 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.

James Friedland: Thank you. Welcome, everyone. Thank you for standing by.

James Friedland: Welcome, everyone. Thank you for standing by.

James Friedland: Thank you. Good afternoon, everyone, and welcome to Alphabet's second quarter 2024 earnings conference call. With us today are Sundar Pichai, Philipp Schindler, and Ruth Porat. Now, I'll quickly cover the safe harbor.

Speaker Change: Thank you. Good afternoon, everyone. And welcome to Alphabet's second quarter 2024 earnings conference call. With us today are Sundar Pichai, Philipp Schindler, and Ruth Porat.

James Friedland: Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. However, actual results could differ materially.

Speaker Change: 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. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially.

James Friedland: Please refer to our forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement. 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 www.abc.xyz.com. Our comments will be on year-over-year comparisons unless we state otherwise. And now, I'll turn the call over to Sundar.

James Friedland: Please refer to our forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement.

James Friedland: 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

James Friedland: ABC.xyz forward slash investor

James Friedland: Our comments will be on year-over-year comparisons unless we state otherwise. And now, I'll turn the call over to Sundar.

Sundar Pichai: Thank you, Jim, and hello, everyone. I'm really pleased with our results this quarter. They show tremendous ongoing momentum in search and great progress in cloud, with our AI initiatives driving new growth. Search had another excellent quarter.

Sundar Pichai: Thank you, Jim, and hello everyone. I'm really pleased with our results this quarter. They showed tremendous ongoing momentum in search and great progress in cloud with our AI initiatives driving new growth.

Sundar Pichai: And in terms of product innovation, we are seeing great progress with AI overviews. In Q2, Cloud reached some major milestones. Quarterly revenues crossed the $10 billion mark for the first time, and at the same time, passed the $1 billion mark in quarterly operating profit.

Speaker Change: Search had another excellent quarter, and in terms of product innovation, we are seeing great progress with AI overviews.

Speaker Change: In Q2, cloud reached some major milestones. Quarterly revenues crossed the $10 billion mark for the first time, at the same time passed the $1 billion mark in quarterly operating profit.

Sundar Pichai: Year-to-date, our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues and are being used by more than 2 million developers. As I spoke about last quarter, we are uniquely well-positioned for the AI opportunity ahead. Our research and infrastructure leadership means we can pursue an in-house strategy that enables our product teams to move quickly. Combined with our model building expertise, we are in a strong position to control our destiny as the technology continues to evolve. Importantly, we are innovating at every layer of the AI stack, from chips to agents and beyond. This is a huge strength, and we are committed to this leadership for the long term.

Speaker Change: Year-to-date, our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues and are being used by more than 2 million developers.

Speaker Change: As I spoke about last quarter, we are uniquely well positioned for the AI opportunity ahead. Our research and infrastructure leadership means we can pursue an in-house strategy that enables our product teams to move quickly.

Speaker Change: Combined with our model building expertise, we are in a strong position to control our destiny as the technology continues to evolve.

Speaker Change: Importantly, we are innovating at every layer of the AI stack.

Speaker Change: from chips to agents and beyond, a huge strength.

Sundar Pichai: This was underscored by the announcements we made at IO, Cloud Next, and Google Marketing Live, and we'll touch on many of them here. Today, I'll start with search, then move to our AI momentum more generally, followed by cloud, YouTube, and some closing thoughts. So, let's dive in.

Speaker Change: We are committed to this leadership long-term. This was underscored by the announcements we made at I-O, Cloud Next, and Google Marketing Live, and we'll touch on many of them here.

Speaker Change: Today, I'll start with Search, then move to our AI momentum more generally, followed by Cloud, YouTube, and some closing thoughts.

Sundar Pichai: Over the past 25 years, we have continued to reimagine and expand Google Search across many technological platforms. With AI, we are delivering better responses to more types of search queries and introducing new ways to search. We are pleased to see the positive trends from our testing continue as we roll out AI overviews, including increases in search usage and increased user satisfaction with the results. People who are looking for help with complex topics are engaging more and keep coming back for the AI overview. And we see even higher engagement from younger users, age 18 to 24, when they use Search with the AI overview.

Speaker Change: Let's dive in. Over the past 25 years, we have continued to reimagine and expand Google Search across many technological shifts.

Speaker Change: With AI, we are delivering better responses on more types of search queries and introducing new ways to search.

Speaker Change: We are pleased to see the positive trends from our testing continue as we roll out AI overviews, including increases in search usage and increased user satisfaction with the results.

Speaker Change: People who are looking for help with complex topics are engaging more and keep coming back for AI overviews, and we see even higher engagement from younger users aged 18 to 24 when they use Search with AI overviews.

Sundar Pichai: As we have said, we are continuing to prioritize approaches that send traffic to sites across the web. And we are seeing that ads appearing either above or below AI overviews continue to provide valuable options for people to take action and connect with businesses. Beyond AI overviews, AI expands the types of queries we are able to address and opens up powerful new ways to search. Visual Search via Lens is one.

Speaker Change: As we have said, we are continuing to prioritize approaches that send traffic to sites across the web.

Speaker Change: and we are seeing that ads appearing either above or below AI overviews continue to provide valuable options for people to take action and connect with businesses.

Speaker Change: Beyond AI overviews, AI expands the types of queries we are able to address and opens up powerful new ways to search.

Sundar Pichai: Soon, you'll be able to ask questions by taking a video with Lens. And already, we have seen that AI overviews in Lens lead to an increase in overall visual search use. Another example is Circle to Search, which is available today on more than 100 million Android devices. We are seeing tremendous momentum from our AI investment. More than 1.5 million developers are now using Gemini across our developer tools, and we recently unveiled new models that are more capable and efficient than ever. Gemini now comes in four sizes, with each model designed for its own set of use cases.

Speaker Change: Visual Search via Lens is one. Soon you'll be able to ask questions by taking a video with Lens.

Speaker Change: And already we have seen that AI overviews in Lens leads to an increase in overall visual search usage.

Speaker Change: Another example is Circle to Search, which is available today on more than 100 million Android devices.

Speaker Change: We are seeing tremendous momentum from our AI investments.

Speaker Change: More than 1.5 million developers are now using Gemini across our developer tools.

Speaker Change: and we recently unveiled new models that are more capable and efficient than ever.

Speaker Change: Gemini now comes in four sizes with each model designed for its own set of use cases. It's a versatile model family that runs efficiently on everything from data centers to devices.

Sundar Pichai: It's a versatile model family that runs efficiently on everything from data centers to devices. At 2 million tokens, we offer the longest context window of any large-scale foundation model to date, which powers developer use cases that no other model can handle. Gemini is making Google's own products better. All six of our products with more than 2 billion monthly users now use Gemini. This means that Google is the company that's truly bringing AI to everyone.

Speaker Change: At 2 million tokens, we offer the longest context window of any large-scale foundation model to date, which powers developer use cases that no other model can handle.

Speaker Change: Gemini is making Google's own products better. All six of our products with more than 2 billion monthly users now use Gemini.

Speaker Change: This means that Google is the company that's truly bringing AI to everyone. Gemini is powering incredibly helpful features in Search, Workspace, Google Messages, and more. At IO, we showed new features coming soon to Gmail and to Google Photos.

Sundar Pichai: Gemini is powering incredibly helpful features in Search, Workspace, Google Messages, and more. At IO, we showed new features coming soon to Gmail and to Google Photos. Soon, you'll be able to ask photos questions like, "What did I eat at that restaurant in Paris last night?".

Speaker Change: Soon, you'll be able to ask photos questions like, what did I eat at that restaurant in Paris last year?

Sundar Pichai: For a glimpse of the future, I hope you saw Project Astra at I-O. It shows multimodal understanding and natural conversational capability. We've always wanted to build a universal agent, and it's an early look at how they can be helpful in daily life. Our AI product advances come from our longstanding foundation of research leadership as well as our global network of infrastructure. In Q2, we announced our first data center and cloud region in Malaysia and expansion projects in Iowa, Virginia, and Ohio. Our TPUs are a key bet here too. Trillium is the sixth generation of our custom AI accelerator, and it's our best performing and most energy efficient TPU today.

Speaker Change: For a glimpse of the future, I hope you saw Project Astra at I-O. It shows multimodal understanding and natural conversational capabilities.

Speaker Change: We've always wanted to build a universal agent, and it's an early look at how they can be helpful in daily life.

Speaker Change: Our AI product advances come from our long-standing foundation of research leadership as well as our global network of infrastructure.

Speaker Change: In Q2, we announced our first data center and cloud region in Malaysia and expansion projects in Iowa, Virginia, and Ohio.

Speaker Change: Our TPUs are a key bet here too. Trillium is the 6th generation of our custom AI accelerator and it's our best performing and most energy efficient TPU to date.

Sundar Pichai: It achieves a near 5x increase in peak compute performance per chip and is 67% more energy efficient compared to TPU v5e, and the latest NVIDIA Blackwell platform will be coming to Google Cloud in early 2025. We continue to invest in designing and building robust and efficient infrastructure to support our efforts in AI, given the many opportunities we see ahead. Of course, as we do this, we'll continue to create capacity by allocating resources towards our highest priority.

Speaker Change: It achieves a near 5x increase in peak compute performance per chip and is 67% more energy efficient compared to TPU v5e.

Speaker Change: and the latest NVIDIA Blackwell platform will be coming to Google Cloud in early 2025. We continue to invest in designing and building robust and efficient infrastructure to support our efforts in AI given the many opportunities we see ahead.

Speaker Change: Of course, as we do this, we'll continue to create capacity by allocating resources towards our highest priorities.

Sundar Pichai: We are relentlessly driving efficiencies in our AI model. For example, over the past quarter, we have made quality improvements that include doubling the core model size for AI overviews while at the same time improving latency and keeping cost per AI overview served flat. And we are focused on matching the right model size to the complexity of the query in order to minimize impact on cost and latency.

Speaker Change: We are relentlessly driving efficiencies in our AI models. For example, over the past quarter, we have made quality improvements that include doubling the core model size for AI overviews, while at the same time improving latency and keeping costs per AI overview served flat.

Speaker Change: And we are focused on matching the right model size to the complexity of the query in order to minimize impact on cost and latency.

Speaker Change: Separately on our real estate investments, we are taking a measured approach to match the current and future needs of our hybrid workforce as well as our local communities.

Sundar Pichai: On our real estate investments, we are taking a measured approach to match the current and future needs of our hybrid workforce, as well as our local community. Next, Google Cloud. We continue to see strong customer interest, winning leading brands like Hitachi, Motorola Mobility, and KPMG. Our deep partnership with Oracle significantly expanded our joint offerings to their large customer base. Our momentum begins with our AI infrastructure, which provides AI startups like Essential AI with leading cost performance for models and high-performance computing applications. We continue to drive fundamental differentiation with new advances since Cloud Next. This includes Trillium, which I mentioned earlier, and A3 Mega, powered by NVIDIA H100 GPUs, which doubles the networking bandwidth of A3.

Speaker Change: Next, Google Cloud. We continue to see strong customer interest, winning leading brands like Hitachi, Motorola Mobility, and KPMG. Our deep partnership with Oracle significantly expanded our joint offerings to their large customer base.

Speaker Change: Our momentum begins with our AI infrastructure, which provides AI startups like Essential AI with leading cost performance for models and high-performance computing applications.

Speaker Change: We continue to drive fundamental differentiation with new advances since Cloud Next. This includes Trillium, which I mentioned earlier, and A3 Mega, powered by NVIDIA H100 GPUs, which doubles the networking bandwidth of A3.

Sundar Pichai: Last month, we announced a number of new advances. Uber and WBP are using Gemini Pro 1.5 and Gemini Flash 1.5 in areas like customer experience and marketing. We also broaden support for third-party models, including Anthropx Cloud 3.5 Sonnet and open-source models like Gemma 2, Lama, and Mistral. We are the only cloud provider to offer grounding with Google Search, and we are expanding grounding capabilities with Moody's, MSCI, ZoomInfo, and more.

Speaker Change: Our enterprise AI platform, Vertex, helps customers such as Deutsche Bank, Kingfisher, and the U.S. Air Force build powerful AI agents.

Speaker Change: Last month we announced a number of new advances.

Speaker Change: Uber and WPP are using Gemini Pro 1.5 and Gemini Flash 1.5 in areas like customer experience and marketing.

Speaker Change: We broaden support for third-party models, including Anthropx Cloud 3.5 Sonnet and open source models like Gemma 2, Lama, and Mistral.

Speaker Change: We are the only cloud provider to offer grounding with Google Search, and we are expanding grounding capabilities with Moody's, MSCI, ZoomInfo, and more. Our AI-powered applications portfolio is helping us win new customers and drive upsell.

Sundar Pichai: Our AI-powered applications portfolio is helping us win new customers and drive up sales. For example, our conversational AI platform is helping customers like Best Buy and Gordon Food Service. Gemini for Workspace helps Click Therapeutics analyze patient feedback as they build targeted digital treatments.

Speaker Change: For example, our conversational AI platform is helping customers like Best Buy and Gordon Food Service.

Speaker Change: Gemini for Workspace helps Click Therapeutics analyze patient feedback as they build targeted digital treatments.

Sundar Pichai: Our AI-powered agents are also helping customers develop better quality software, find insights from their data, and protect their organization against cybersecurity threats using Gemini. For example, software engineers at Wipro are using Gemini CodeAssist to develop, test, and document software faster, and Data Analysts at MercadoLibre are using BigQuery and Looker to optimize capacity planning and fulfill shipments faster. Cybersecurity risks continue to accelerate, and the number of breaches continues to grow, something we all see in the news every day and that our Mandian teams help manage.

Speaker Change: Our AI-powered agents are also helping customers develop better quality software, find insights from their data, and protect their organization against cybersecurity threats using Gemini.

Speaker Change: Software engineers at Wipro are using Gemini CodeAssist to develop, test, and document software faster.

Speaker Change: Data Analysts at MercadoLibre are using BigQuery and Looker to optimize capacity planning and fulfill shipments faster.

Speaker Change: Cybersecurity risks continue to accelerate and the number of breaches continue to grow, something we all see in the news every day and that our Mandian teams help manage.

Sundar Pichai: A strong track record of uptime, quality control, and reliability make Google Cloud the trusted security choice for organizations like FISERV and Marriott International. In Q2, we infused AI throughout our security portfolio, helping TELUS strengthen its proactive security posture. Turning next to YouTube.

Speaker Change: A strong track record of uptime, quality control, and reliability made Google Cloud the trusted security choice for organizations like FISERV and Marriott International.

Speaker Change: In Q2, we infused AI throughout our security portfolio, helping TELUS strengthen its proactive security posture.

Sundar Pichai: YouTube is focused on a clear strategy, connecting creators with a massive audience and enabling them to build successful businesses through ads and subscriptions while helping advertisers reach their desired audience. We had a great Brandcast this quarter, and Philipp will say more. I'm pleased at the progress here. YouTube has remained number one in US streaming watch time, according to Nielsen. Views of YouTube Shorts on Connected TV are more than double what they were last year, and we are making it easier for creators to add captions and turn regular videos into Shorts.

Speaker Change: Turning next to YouTube. YouTube is focused on a clear strategy, connecting creators with a massive audience and enabling them to build successful businesses through ads and subscriptions while helping advertisers reach their desired audience.

Speaker Change: We had a great Brandcast this quarter, and Philip will say more. I'm pleased at the progress here. YouTube has remained number one in US streaming watch time, according to Nielsen.

Philipp Schindler: Views of YouTube Shorts and Connected TV's more than doubled last year.

Philipp Schindler: We are making it easier for creators to add captions and turn regular videos into shorts.

Sundar Pichai: Next on Android and Pixel. We joined Samsung for their Galaxy Unpacked event a few weeks ago, and we shared that Samsung's new devices will include the latest AI-powered Google updates on Android. It was a great event.

Speaker Change: Next, on Android and Pixel.

Speaker Change: We joined Samsung for their Galaxy Unpacked event a few weeks ago, and we shared that Samsung's new devices will include the latest AI-powered Google updates on Android. It was a great event.

Sundar Pichai: I'm looking forward to our Made by Google event happening in August. We'll have lots to share around Android and the Pixel portfolio of devices. Our Pixel line is doing well. We recently introduced the new Pixel 8a, powered by our latest Google Tensor G3 chip.

Speaker Change: I'm looking forward to our Made by Google event happening in August . We'll have lots to share around Android and the Pixel portfolio of devices.

Speaker Change: Our Pixel line is doing well. We recently introduced the new Pixel 8a, powered by our latest Google Tensor G3 chip. It provides beautiful AI experiences like Circle to Search, Best Take, and a Gemini-powered AI Assistant.

Sundar Pichai: It provides beautiful AI experiences like Circle to Search, Best Take, and a Gemini-powered AI assistant. On other bets, I'm really pleased with the progress Waymo is making; it's a real leader in the space and getting rave reviews from users. Waymo has served more than 2 million trips to date and driven more than 20 million fully autonomous miles on public roads. MAMO is now delivering well over 50,000 weekly paid public rides, primarily in San Francisco and Phoenix. And in June, we removed the wait list in San Francisco so anyone could take a ride.

Speaker Change: In other bets, I'm really pleased with the progress Waymo is making, a real leader in the space and getting rave reviews from users. Waymo has served more than 2 million trips to date and driven more than 20 million fully autonomous miles on public roads.

Speaker Change: MAMO is now delivering well over 50,000 weekly paid public rides, primarily in San Francisco and Phoenix.

Speaker Change: and in June we removed the waitlist in San Francisco so anyone can take a ride.

Sundar Pichai: Fully autonomous testing is underway in other Bay Area locations without a human in the driver's seat. Before I close, I want to acknowledge that today is Ruth's final earnings call. Let me take a moment to thank her for all she has done for Google and Alphabet as our longest-serving CFO. I'm excited to continue to work with her in her new role, and I look forward to welcoming our newly appointed CFO, Anath Ashkenazi. She starts next week, and you'll hear from her on our call next quarter. Thanks, as always, to our employees and partners everywhere for a great Q2. With that, over to you, Philip.

Speaker Change: Fully autonomous testing is underway in other Bay Area locations without a human in the driver's seat.

Ruth Porat: Before I close, I want to acknowledge that today is Ruth's final earnings call. Let me take a moment to thank her for all she has done for Google and Alphabet as our longest-serving CFO .

Speaker Change: I'm excited to continue to work with her in her new role, and I look forward to welcoming our newly appointed CFO , Anath Ashkenazi. She starts next week, and you'll hear from her on our call next quarter.

Philipp Schindler: Thanks, as always, to our employees and partners everywhere for a great Q2. With that, over to you, Philipp.

Philipp Schindler: Thanks, Sundar, and hello, everyone. Starting with performance, Google services delivered revenues of $73.9 billion for the quarter, up 12% year on year. Search and other revenues grew 14% year-on-year, led by growth in the retail vertical, followed by financial services. YouTube ads revenues were up 13% year-on-year, driven by growth and brand, as well as direct response. Network revenues declined 5% year-on-year.

Philipp Schindler: Thanks Sundar and hello everyone. Starting with performance, Google Services delivered revenues of $73.9 billion for the quarter, up 12% year on year. Search and other revenues grew 14% year on year, led by growth and the retail vertical, followed by financial services.

Philipp Schindler: YouTube ads revenues were up 13% year-on-year, driven by growth in brand, as well as direct response. Network revenues declined 5% year-on-year. In subscriptions, platforms, and devices, year-on-year revenues increased 14%, driven again by strong growth in YouTube subscriptions.

Philipp Schindler: In subscriptions, platforms, and devices, year-on-year revenues increased 14%, driven again by strong growth in YouTube subscriptions. For the rest of my remarks, I want to double-click on two topics. First, how we are applying AI across the marketing process to deliver an even stronger ads experience. Second, YouTube's position as the leading multi-format platform. So, let me start by sharing some of the ways we're applying AI to bring more performance benefits to even more businesses.

Speaker Change: For the rest of my remarks, I want to double-click on two topics. First, how we are applying AI across the marketing process to deliver an even stronger ads experience.

Speaker Change: Second, YouTube's position as the leading multi-format platform.

Speaker Change: So let me start by sharing some of the ways we're applying AI to bring more performance benefits to even more businesses.

Philipp Schindler: Q2 brought several major opportunities to meet and learn from users, developers, creators, and customers. From I-O to Brandcast, Google Marketing Live, and CAN, a growing number of our customers and partners are looking to understand how to successfully incorporate AI into their business.

Speaker Change: Q2 brought several major opportunities to meet and learn from users, developers, creators, and customers.

Speaker Change: From IO to Brandcast, Google Marketing Live and CAN, a growing number of our customers and partners are looking to understand how to successfully incorporate AI into their businesses.

Philipp Schindler: This quarter, we announced over 30 new ads, features, and products to help advertisers leverage AI and keep pace with the evolving expectations of customers and users. Across search, PMax, demand gen, and retail, we're applying AI to streamline workflows, enhance creative asset production, and provide more engaging experiences for consumers. Listening to our customers, retailers in particular, have welcomed AI-powered features to help scale the depth and breadth of their assets. For example, as part of a new and easier-to-use merchant center, we've expanded Product Studio with tools that bring the power of Google AI to every business owner. You can upload a product image from the AI with something like, "feature this product with the Paris skyline in the background," and Product Studio will generate campaign-ready assets.

Speaker Change: This quarter, we announced over 30 new ads, features, and products to help advertisers leverage AI and keep pace with the evolving expectations of customers and users.

Speaker Change: Across Search, PMax, DemandGen, and Retail, we're applying AI to streamline workflows, enhance creative asset production, and provide more engaging experiences for consumers.

Philipp Schindler: I also hear great feedback from our customers on many of our other new AI-powered features. We're beta testing virtual try-on and shopping ads and plan to roll them out widely later this year. Feedback shows this feature gets 60% more high-quality views than other images and a higher click-out to retailer sites. Retailers love it because it drives purchasing decisions and fewer returns.

Speaker Change: Listening to our customers, retailers in particular have welcomed AI-powered features to help scale the depth and breadth of their assets.

Speaker Change: For example, as part of a new and easier-to-use Merchant Center, we've expanded Product Studio with tools that bring the power of Google AI to every business owner.

Speaker Change: You can upload a product image from the AI with something like, feature this product with Paris skyline in the background, and Product Studio will generate campaign-ready assets.

Speaker Change: I also hear great feedback from our customers on many of our other new AI-powered features.

Speaker Change: We're beta testing virtual try-on and shopping ads and plan to roll it out widely later this year. Feedback shows this feature gets 60% more high-quality views than other images and a higher click-out to retailer sites. Retailers love it because it drives purchasing decisions and fewer returns.

Philipp Schindler: Our AI-driven profit optimization tools have been expanded to Performance Max and Standard Shopping Components. Advertisers who use profit optimization and smart bidding see a 15% uplift in profit on average compared to revenue-only bidding. Lastly, DemandGen is rolling out to Display & Video 360 and Search Ad 360 in the coming months, with new generative image tools that create stunning, high-quality image assets for social marketers. As we said at GML, when paired with Search or PMax, DemandGen delivers an average of 14% more conversions. The use cases we're seeing across the industry show the incredible potential of these AI-enabled products to improve performance. Let me briefly share two examples with you.

Speaker Change: Our AI-driven profit optimization tools have been expanded to performance max and standard shopping campaigns.

Speaker Change: Advertisers use profit optimization and smart bidding to see a 15% uplift in profit on average compared to revenue-only bidding.

Speaker Change: Lastly, DemandGen is rolling out to Display & Video 360 and Search Ads 360 in the coming months with new generative image tools that create stunning, high-quality image assets for social marketers.

Speaker Change: As we said at GML, when paired with Search or PMax, demand gen delivers an average of 14% more conversions.

Speaker Change: The use cases we're seeing across the industry show the incredible potential of these AI-enabled products to improve performance.

Philipp Schindler: Luxury Jewelry Retailer Tiffany leveraged demand gen during the holiday season and saw a 2.5% brand lift in consideration and actions, such as adding items to carts and booking appointments. Additionally, the campaign drove a 5.6 times more efficient cost per click compared to social media benchmarks. Our own Google marketing team used Dimension to create nearly 4,500 ad variations for a Pixelate campaign shown across YouTube, Discover, and Gmail, delivering twice the click-through rate at nearly a quarter of the cost.

Speaker Change: Let me briefly share two examples with you.

Speaker Change: Luxury Jewelry Retailer Tiffany leveraged demand gen during the holiday season and saw a 2.5% brand lift in consideration and actions, such as adding items to carts and booking appointments.

Speaker Change: The campaign drove a 5.6 times more efficient cost per click compared to social media benchmarks.

Speaker Change: Our own Google Marketing team used DementiaN to create nearly 4,500 ad variations for a Pixelate campaign shown across YouTube, Discover, and Gmail, delivering twice the click-through rate at nearly a quarter of the cost.

Philipp Schindler: In addition to strengthening our ads products for customers, we continue to evolve our existing systems and products with improved models, delivering further performance gains. For example, in just six months, AI-driven improvements to quality, relevance, and language understanding have improved broad match performance by 10% for advertisers using smart bidding. Also, advertisers who adopt PMax to broad match and smart bidding in their search campaigns see an average increase of over 25% more conversions or value at a similar cost.

Speaker Change: In addition to strengthening our ads products for customers, we continue to evolve our existing systems and products with improved models, delivering further performance gains.

Speaker Change: In just six months, AI-driven improvements to quality, relevance, and language understanding have improved broad match performance by 10% for advertisers using smart bidding.

Speaker Change: Also, advertisers who adopt PMax to broad match and smart bidding in their search campaigns see an average increase of over 25% more conversions or value at a similar cost.

Philipp Schindler: We'll continue to listen to our customers and use their feedback to drive innovation across our products. As you can hear, I continue to be excited about the AI era for ads. Now, let's turn to YouTube. I've talked before about our approach to making YouTube the best place to create, watch, and monetize. First, the best place to create.

Speaker Change: We'll continue to listen to our customers and use their feedback to drive innovation across our products. As you can hear, I continue to be excited about the AI era for ads.

Speaker Change: Now let's turn to YouTube.

Speaker Change: I've talked before about our approach to making YouTube the best place to create, watch, and monetize. First, the best place to create. What sets YouTube apart from every other platform are the creators and the connection they have with their fans.

Philipp Schindler: What sets YouTube apart from every other platform are the creators and the connection they have with their fans. Audiences tuning in to watch their favorite creators continue to grow. For example, two weeks ago, Mr. B's channel had more than 300 million subscribers. Next, the best place to watch.

Speaker Change: Audience is tuning in to watch their favorite creators continue to grow. For example, two weeks ago, Mr. B's channel hit more than 300 million subscribers.

Philipp Schindler: Our long-term investment in CTV continues to deliver. Views on CTV have increased more than 130% in the last three years. According to Nielsen, YouTube is the number one most watched streaming platform on TV screens in the U.S. for the 17th consecutive month.

Speaker Change: Next, the best place to watch. Our long-term investment in CTV continues to deliver. Views on CTV have increased more than 130% in the last three years.

Speaker Change: According to Nielsen, YouTube is the number one most-watched streaming platform on TV screens in the U.S. for the 17th consecutive month.

Philipp Schindler: Zooming out, when you look not just at streaming but at all media companies and their combined TV viewership, YouTube is the second most watched after Disney. And this growth is happening in multiple verticals, including sports, which has seen CTV watch time on YouTube grow 30% year over year. Lastly, the best place to monetize. CTV on YouTube is continuing to benefit from a combination of strong watch time growth, viewer and advertiser innovation, and a shift in brand advertising budgets from linear TV to YouTube.

Speaker Change: Zooming out, would you look not just at streaming, but at all media companies and their combined TV viewership. YouTube is the second most watched after Disney.

Speaker Change: And this growth is happening in multiple verticals, including sports, which has seen CTV watch time on YouTube grow 30% year over year.

Speaker Change: Lastly, the best place to monetize. CTV on YouTube is continuing to benefit from a combination of strong watch time growth, viewer and advertiser innovation, and a shift in brand advertising budgets from linear TV to YouTube.

Philipp Schindler: Our largest advertisers across verticals, including retail, entertainment, telco, and home and personal care, are partnering with creators on ads and organic integration. Verizon, for example, worked with a YouTube creator and Verizon customer to show them many ways that plans and offerings can be customized to fit people's lives. Using AI-powered formats, they created sketches in multiple lengths and orientations to serve the right creative to the right viewer and drive people to their site. Verizon's crater ads had a 15% lower CPA and a 38% higher conversion rate versus other ads. Turning to shorts.

Speaker Change: Our largest advertisers across verticals, including retail, entertainment, telco, and home and personal care, are partnering with creators on ads and organic integrations.

Speaker Change: Verizon, for example, worked with a YouTube creator and Verizon customer to show them many ways that plans and offerings can be customized to fit people's lives.

Speaker Change: Using AI-powered formats, they created sketches in multiple lengths and orientations to serve the right creative to the right viewer and drive people to their site. Verizon's creator ads had a 15% lower CPA and a 38% higher conversion rate versus other ads.

Philipp Schindler: Last quarter, I shared that in the US, the monetization rate of YouTube shorts relative to in-stream viewing is showing a healthy rate of growth. Again, this quarter, we continue to see an improvement in Schwartz monetization, particularly in the U.S. We're also seeing a very encouraging contribution from Brand Advertising on Shorts, which we launched on the product in Q4 last year. Lastly, a few words on shopping.

Speaker Change: Turning to Shorts. Last quarter, I shared that in the US, the monetization rate of YouTube Shorts relative to in-stream viewing is showing a healthy rate of growth.

Speaker Change: Again, this quarter we continue to see an improvement in Schwartz monetization, particularly in the US.

Speaker Change: We're also seeing a very encouraging contribution from Brand Advertising on Shorts, which we launched on the product in Q4 last year.

Philipp Schindler: Last year, viewers watched 30 billion hours of shopping-related videos, and we saw a 25% increase in watch time for videos that help people shop. While it's still early days, shopping remains a key area of investment. At GML, we rolled out several product updates to YouTube Shopping, helping creators sell products to their viewers. These updates included product tagging, where creators can tag products in their videos for viewers to discover and purchase, product collections, and a new affiliate hub, a one-stop shop for creators to find deals and promotional offers from brands and track their affiliate earnings.

Speaker Change: Lastly, a few words on shopping. Last year, viewers watched 30 billion hours of shopping-related videos and we saw a 25% increase in watch time for videos that help people shop. While it's still early days, shopping remains a key area of investment.

Speaker Change: At GML, we rolled out several product updates to YouTube Shopping, helping creators sell products to their viewers.

Speaker Change: These updates included product tagging, where creators can tag products in their videos for viewers to discover and purchase, product collections, and a new affiliate hub, a one-stop shop for creators to find deals and promotional offers from brands and track their affiliate earnings.

Philipp Schindler: With that, I'll finish by saying a huge thank you to Googlers everywhere for their extraordinary commitment and to our customers and partners for their continued collaboration and trust. And Ruth, thanks for your amazing leadership and partnership over all these years. Now, for one last time, it's over to you.

Speaker Change: With that, I'll finish by saying a huge thank you to Googlers everywhere for their extraordinary commitment and to our customers and partners for their continued collaboration and trust.

Speaker Change: And Ruth, thanks for your amazing leadership and partnership over all these years. Now for one last time, it's over to you.

Ruth Porat: Thank you, Philip, and thanks, Sundar, for those kind words. We had another strong quarter, driven in particular by performance in search and cloud, as well as the ongoing efforts to durably re-engineer our cost base. 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 $84.7 billion, up 14% or up 15% in constant currency.

Ruth Porat: Thank you, Philipp, and thanks, Sundar, for those kind words. We had another strong quarter, driven in particular by performance in search and cloud, as well as the ongoing efforts to durably re-engineer our cost base.

Ruth Porat: Search remained the largest contributor to revenue growth. In terms of expenses, total cost of revenues was $35.5 billion, up 11%. Other cost of revenues was $22.1 billion, up 14%, with the increase driven primarily by content acquisition costs, followed by depreciation, as well as the impact of the Canadian Digital Services Tax, which was applied retroactively. Operating expenses were $21.8 billion, up 5%, primarily reflecting an increase in R&D, partially offset by a decline in G&A, with sales and marketing essentially flat to the second quarter last year.

Ruth Porat: 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.

Ruth Porat: The increase in R&D was driven primarily by compensation, which was affected by lapping a reduction in valuation-based compensation liabilities in certain other bets in the second quarter last year, followed by depreciation. The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters.

Ruth Porat: Operating income was $27.4 billion, up 26%, and our operating margin was 32%. Net income was $23.6 billion, and EPS was $1.89. We delivered free cash flow of $13.5 billion in the second quarter and $60.8 billion for the trailing 12 months. As a reminder, last year, we had a timing benefit in the second and third quarters from a $10.5 billion deferred cash tax payment made in the fourth quarter, which depressed reported free cash flow growth this quarter and will do so again next quarter. We ended the quarter with $101 billion in cash and marketable securities.

Ruth Porat: For the second quarter, our consolidated revenues were $84.7 billion, up 14% or up 15% in constant currency. SEARCH remained the largest contributor to revenue growth.

Ruth Porat: In terms of expenses, total cost of revenues was $35.5 billion up 11%.

Ruth Porat: Other cost of revenues was $22.1 billion, up 14%, with the increase driven primarily by content acquisition costs, followed by depreciation, as well as the impact of the Canadian Digital Services Tax, which was applied retroactively.

Ruth Porat: Operating expenses were $21.8 billion, up 5%, primarily reflecting an increase in R&D, partially offset by a decline in G&A, with sales and marketing essentially flat to the second quarter last year.

Ruth Porat: The increase in R&D was driven primarily by compensation, which was affected by lapping a reduction in valuation-based compensation liabilities in certain other bets in the second quarter last year.

Ruth Porat: Followed by depreciation.

Ruth Porat: The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters.

Ruth Porat: Operating income was $27.4 billion, up 26%, and our operating margin was 32%. Net income was $23.6 billion, and EPS was $1.89.

Ruth Porat: We delivered free cash flow of $13.5 billion in the second quarter and $60.8 billion for the trailing 12 months.

Ruth Porat: As a reminder, last year we had a timing benefit in the 2nd and 3rd quarters

Ruth Porat: from a $10.5 billion deferred cash tax payment made in the fourth quarter, which depressed reported free cash flow growth this quarter, and will do so again next quarter. We ended the quarter with $101 billion in cash and marketable securities.

Ruth Porat: Turning to segment results, within Google services, revenues were $73.9 billion, up 12%. Google Search and other advertising revenues of $48.5 billion in the quarter were up 14%, led again by growth in retail, followed by the financial services vertical. YouTube advertising revenues of $8.7 billion were up 13%, driven by brand, followed by direct response to advertising. Network Advertising revenues of $7.4 billion or down 5% Subscription platforms and devices revenues were $9.3 billion, up 14%, primarily reflecting growth in YouTube subscription revenues. TAG was $13.4 billion, up 7%.

Ruth Porat: Turning to segment results.

Ruth Porat: Within Google services, revenues were $73.9 billion, up 12%.

Ruth Porat: Google Search and other advertising revenues of $48.5 billion in the quarter were up 14%, led again by growth in retail, followed by the financial services vertical.

Ruth Porat: YouTube advertising revenues of $8.7 billion were up 13%, driven by brand, followed by direct response to advertising.

Ruth Porat: Network Advertising Revenues of $7.4 Billion or Down 5%

Ruth Porat: Subscription platforms and devices revenues were $9.3 billion, up 14%, primarily reflecting growth in YouTube subscription revenues.

Ruth Porat: Google services operating income was $29.7 billion, up 27%, and the operating margin was 40%. Turning to the Google Cloud segment, revenues were $10.3 billion for the quarter, up 29%, reflecting first, significant growth in GCP, which was above growth for the cloud overall and includes an increasing contribution from AI, and second, strong Google Workspace growth, primarily driven by increases in average revenue per seat. Google Cloud delivered operating income of $1.2 billion and an operating margin of 11%. As to our other bets for the second quarter, revenues were $365 million, and the operating loss was $1.1 billion.

Ruth Porat: TAC was $13.4 billion, up 7% Google Services operating income was $29.7 billion, up 27% and the operating margin was 40%

Ruth Porat: Turning to the Google Cloud segment, revenues were $10.3 billion for the quarter, up 29%.

Ruth Porat: reflecting first significant growth in GCP which was above growth for cloud overall and includes an increasing contribution from AI and second strong Google Workspace growth primarily driven by increases in average revenue per seat.

Ruth Porat: Google Cloud delivered operating income of $1.2 billion and an operating margin of 11%.

Ruth Porat: As to our other bets for the second quarter, revenues were $365 million and the operating loss was $1.1 billion.

Ruth Porat: Turning to our outlook for the business, with respect to Google services, first within advertising, the strong performance of search was broad-based across verticals. In YouTube, we are pleased with the growth in the quarter. We had healthy watch time growth, continued to close the monetization gap in shorts, and had continued momentum in connected TV, with brands benefiting in part from an ongoing shift in budgets from linear television to digital. As we look forward to the third quarter, we will be lapping the increasing strength in advertising revenues in the second half of 2023, in part from APAC-based retailers.

Ruth Porat: Turning to our Outlook for the business, with respect to Google services.

Ruth Porat: First Within Advertising

Ruth Porat: The strong performance of search was broad-based across verticals.

Ruth Porat: In YouTube, we are pleased with the growth in the quarter. We had healthy watch time growth, continued to close the monetization gap in shorts.

Ruth Porat: and had continued momentum in Connected TV.

Ruth Porat: with brand benefiting in part from an ongoing shift in budgets from linear television to digital.

Ruth Porat: As we look forward to the third quarter, we will be lapping the increasing strength in advertising revenues in the second half of 2023, in part from APAC-based retailers.

Ruth Porat: Turning to subscriptions, platforms, and devices. First, we continue to have significant growth in our subscriptions business, which drives the majority of revenue growth in this line. However, there was a sequential decline in the year-on-year growth rate as we anniversaried the impact of a price increase for YouTube TV in the second quarter last year.

Ruth Porat: Turning to subscriptions, platforms, and devices.

Ruth Porat: First, we continue to have significant growth in our subscriptions business, which drives the majority of revenue growth in this line. However, there was a sequential decline in the year-on-year growth rate as we anniversaried the impact of a price increase for YouTube TV in the second quarter last year.

Ruth Porat: The impact will persist through the balance of the year. Second, with regard to platforms, we are pleased with the performance in play, driven by an increase in buyers. Finally, with respect to devices, the most important point as we look forward is that our Made by Google launches have been pulled forward into the third quarter from the fourth quarter last year, benefiting revenues in Q3. Turning to the cloud, which continued to deliver very strong results. For the first time, the cloud cost $10 billion in quarterly revenues and $1 billion in quarterly operating profit.

Ruth Porat: The impact will persist through the balance of the year.

Ruth Porat: Second, with regard to platforms, we are pleased with the performance in play, driven by an increase in buyers.

Ruth Porat: Finally, with respect to devices, the most important point as we look forward is that our Made by Google launches have been pulled forward into the third quarter from the fourth quarter last year, benefiting revenues in Q3 this year.

Speaker Change: Turning to cloud, which continued to deliver very strong results. For the first time, cloud cost $10 billion in quarterly revenues and $1 billion in quarterly operating profit.

Ruth Porat: As Sundar noted, year to date, our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues and are being used by more than 2 million developers. We're particularly encouraged that the majority of our top 100 customers are already using our generative AI solutions. We continue to invest aggressively in the business. TURNING TO MARGINS, The margin expansion in Q2 versus last year reflects our ongoing efforts to durably re-engineer our cost base as well as revenue strength.

Speaker Change: As Sundar noted, year-to-date, our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues and are being used by more than 2 million developers.

Speaker Change: We're particularly encouraged that the majority of our top 100 customers are already using our generative AI solutions. We continue to invest aggressively in the business.

Speaker Change: Turning to margins.

Speaker Change: The margin expansion in Q2 versus last year reflects our ongoing efforts to durably re-engineer our cost base as well as revenue strength.

Ruth Porat: Our leadership team remains focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure. However, once again, headcount declined quarter on quarter, which reflects both actions we have taken in the first half of the year and a much slower pace of hiring.

Speaker Change: Our leadership team remains focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure.

Speaker Change: Once again, headcount declined quarter on quarter, which reflects both actions we have taken in the first half of the year and a much slower pace of hiring.

Ruth Porat: Looking ahead, we expect a slight increase in headcount in the third quarter as we bring on new graduates. As we have discussed previously, we are continuing to invest in top engineering and technical talent, particularly in cloud and technical infrastructure. Looking forward, we continue to expect to deliver full-year 2024 Alphabet operating margin expansion relative to 2023. However, in the third quarter, operating margins will reflect the impact of both the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure, as well as the increase in cost of revenues due to the pull-forward of hardware launches into Q3.

Speaker Change: Looking ahead, we expect a slight increase in headcount in the third quarter as we bring on new graduates. As we have discussed previously, we are continuing to invest in top engineering and technical talent, particularly in cloud and technical infrastructure.

Speaker Change: Looking forward, we continue to expect to deliver full year 2024 Alphabet Operating Margin Expansion relative to 2023.

Speaker Change: However, in the third quarter, operating margins will reflect the impact of both the increases in depreciation and expenses.

Speaker Change: Associated with the higher levels of investment in our technical infrastructure.

Speaker Change: as well as the increase in cost of revenues due to the pull forward of hardware launches into Q3.

Ruth Porat: With respect to CapEx, our reported CapEx in the second quarter was $13 billion, once again driven overwhelmingly by investment in our technical infrastructure, with the largest component being servers followed by data centers. Looking ahead, we continue to expect quarterly CapEx throughout the year to be roughly at or above the Q1 CapEx of $12 billion, keeping in mind that the timing of cash payments can cause variability in quarterly reported CapEx.

Speaker Change: With respect to CapEx.

Speaker Change: Our reported CapEx in the second quarter was $13 billion, once again driven overwhelmingly by investment in our technical infrastructure, with the largest component for servers, followed by data centers.

Speaker Change: Looking ahead, we continue to expect quarterly CapEx throughout the year to be roughly at or above the Q1 CapEx of $12 billion, keeping in mind that the timing of cash payments can cause variability in quarterly reported CapEx.

Ruth Porat: With regard to other bets, we continue to focus on improving overall efficiencies as we invest for long-term return. Waymo is an important example of this, with its technical leadership coupled with progress on operational performance. As you will see in the 10-Q, we have chosen to commit to a new multi-year investment of $5 billion. This new round of funding, which is consistent with recent annual investment levels, will enable Waymo to continue to build the world's leading autonomous driving technology company.

Speaker Change: With regard to other bets, we continue to focus on improving overall efficiencies as we invest for long-term returns. Waymo is an important example of this, with its technical leadership coupled with progress on operational performance.

Speaker Change: As you will see in the 10-Q, we have chosen to commit to a new multi-year investment of $5 billion.

Speaker Change: This new round of funding, which is consistent with recent annual investment levels, will enable Waymo to continue to build the world's leading autonomous driving technology company.

Ruth Porat: To close, this is my 56th and last earnings call, 37 of them at Alphabet, so I have a few closing thoughts of gratitude. I've been so proud to be at Google and Alphabet as CFO and to work with some of the smartest people in the world every day. I think we have accomplished a lot in the last nine-plus years, and I am confident that progress will continue. Of course, I'm not going far, and I'm honored to have my new role, which I've been slowly working my way into during the past 11 months, and I look forward to continuing to work with Sundar and our great team. Being CFO of one of the most important companies in the world has been the opportunity and responsibility of a lifetime.

Speaker Change: To close, this is my 56th and last earnings call, 37 of them at Alphabet, so I have a few closing thoughts of gratitude.

Speaker Change: I've been so proud to be at Google and Alphabet as CFO and to work with some of the smartest people in the world every day.

Speaker Change: I think we have accomplished a lot in the last nine plus years, and I am confident that progress will continue.

Speaker Change: Of course, I'm not going far, and I'm honored to have my new role, which I've been slowly working my way into during the past 11 months, and I look forward to continuing to work with Sundar and our great team.

Speaker Change: Being CFO of one of the most important companies in the world has been the opportunity and responsibility of a lifetime.

Ruth Porat: Google's mission of advancing technology and bringing information to people throughout the world is as relevant today as it was when I worked on its IPO. Technology has been a catalyst for economic growth throughout human history. The people on this call know that if technological advancement is not the focus of every business and government, they will be left behind.

Speaker Change: Google's mission of advancing technology and bringing information to people throughout the world is as relevant today as it was when I worked on its IPO.

Speaker Change: Technology has been a catalyst for economic growth throughout human history.

Speaker Change: The people on this call know that if technological advancement is not the focus of every business and government, they will be left behind.

Ruth Porat: Underpinning this is the need for sound and responsible investment. That has never been more important than today, and certainly that is Google and Alphabet's focus. I want to end by thanking Googlers around the world for the innovation and commitment that has enabled us to deliver such extraordinary products and services globally. I also want to thank our investors and analysts for your long-term support and your feedback. Thank you. Sundar, Philipp, and I will now take your questions. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone.

Speaker Change: Underpinning this is the need for sound and responsible investment. That has never been more important than today, and certainly that is Google and Alphabet's focus.

Googlers: I want to end by thanking Googlers around the world for the innovation and commitment that has enabled us to deliver such extraordinary products and services globally.

Speaker Change: I also want to thank our investors and analysts for your long-term support and your feedback. Thank you. Sundar, Philipp, and I will now take your questions.

Speaker Change: Thank you. As a reminder, to ask a question, you will need to press star 1 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 with Morgan Stanley . Your line is now open.

Operator: 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 with Morgan Stanley. Your line is now open.

Brian Nowak: Thanks for taking my questions. First, thank you, Ruth, for all the help and significant impact over the past decade. The first one is a little bit of a jump ball, I guess, for Sundar, Philipp, or Ruth.

Brian Nowak: Thanks for taking my questions. First, thank you, Ruth, for all the help and significant impact over the past decade.

Sundar Pichai: I guess we're sort of 18 months into this fever pitch around Gen AI focus in the world. Maybe from any of your perspectives, can you just sort of talk to us about areas where you've seen faster-than-expected traction or adoption of some of the AI, generative AI capabilities versus slower-than-expected traction and testing from a Google perspective? And then, Ruth, I appreciate all the comments about structurally re-engineering the OpEx base. Are there any more tangible examples of areas you can talk to us about where you still see further ways to drive more efficiency across the company? Thanks. Brian, thanks. I'll take the first part. I think it's a good question.

Speaker Change: The first one, it's a little bit of a jump ball, I guess, for Sundar, Philipp, or Ruth. I guess we're sort of 18 months into this fever pitch around a Gen-AI focus.

Speaker Change: in the world. Maybe from any of your perspective, can you just sort of talk to us about areas where you've seen faster than expected traction or testing adoption of some of the AI, generative AI capabilities versus slower than expected traction and testing from a Google perspective?

Speaker Change: And then Ruth, appreciate all the comments about structurally re-engineering the OpEx space. Are there any more tangible examples of areas you can talk to us about of where you still see further ways to drive more efficiency across the company? Thanks.

Sundar Pichai: You know, obviously, I think there is a time curve in terms of taking the underlying technology and translating it into meaningful solutions across the board, both on the consumer and the enterprise side. Definitely on the consumer side, you know, I'm pleased, as I said in my comments earlier, in terms of how for a product like Search, which is used at that scale over many decades, we've been able to introduce it in a way that is additive and enhances the overall experience and is, you know, positively contributing there. I think across our consumer products, we've been able to, you know, I think we are seeing progress on the organic side. Obviously, monetization is something that we would have to earn on top of it.

Speaker Change: Brian , thanks. I'll take the first part. I think it's a good question. You know, obviously,

Speaker Change: I think...

Speaker Change: I think there is a time curve in terms of taking the underlying technology and translating it into meaningful solutions across the board, both on the consumer and the enterprise side. Definitely on the consumer side, you know, I'm pleased, as I said in my comments earlier, in terms of

Speaker Change: How, for a product like Search, which is used at that scale over many decades, how we've been able to introduce it in a way that it's...

Speaker Change: Additive and enhances the overall experience and is positively contributing there.

Speaker Change: I think across our consumer products, we've been able, you know, I think we are seeing progress on the...

Speaker Change: Organic side obviously monetization is something that we would have to earn on top of it. The enterprise side I think we are at a stage where definitely you know there are a lot of models.

Ruth Porat: On the enterprise side, I think we are at a stage where, definitely, there are a lot of models. But I think, roughly, the models are all kind of converging towards a set of base capabilities. But I think the next wave is, you know, working to build solutions on top of it. And I think there are pockets, you know, be it coding, be it in customer service, etc., where we are seeing some of those use cases, you know, seeing traction, but I still think there is hard work there to completely unlock those.

Speaker Change: I think roughly the models are all kind of converging towards a set of base capabilities.

Speaker Change: But I think where the next wave is, you know, working to build solutions on top of it.

Speaker Change: And I think there are pockets, you know, be it coding, be it customer service, et cetera, where we are seeing some of those use cases, you know, seeing traction, but I still think there is hard work there to completely unlock those.

Ruth Porat: And on your second question, first, thank you for your comments. Look, the reason we consistently use the term and phrase that we're focused on durably reengineering our cost base is because these are deep work streams. They're not tactical fixes, and we continue to build on them.

Speaker Change: And on your second question first, thank you for your comments. Look, the reason we consistently use the term, the phrase, that we're focused on durably re-engineering our cost base

Speaker Change: is because these are deep work streams, they're not tactical fixes, and we continue to build on them. And so the main areas that we've talked about are around product and process prioritization, around organizational efficiency and structure.

Ruth Porat: And so the main areas that we've talked about are around product and process prioritization, and organizational efficiency and structure. Both of those are reflected in headcount and the fact that headcount is down year on year. And across all of those, as I said, across our entire leadership team, we remain focused on continuing to execute against them. So in terms of, you know, the most recent examples, as we talked about last quarter with the combination of the devices and services product area with the platforms and ecosystems product area, we announced that back in April.

Speaker Change: Both of those are reflected in the headcount and the fact that headcount is down year on year.

Speaker Change: and across all of those as I said across our entire leadership team we remain focused on continuing to execute against them so in terms of you know the most recent examples as we talked about

Speaker Change: with the combination of the devices and services product area with the platforms and ecosystems.

Ruth Porat: And what we discussed last quarter and what we're seeing is that unifying teams across these organizations helps with product execution, and what we're really focused on is really adding to velocity and efficiency. So, kind of the gift that keeps giving.

Speaker Change: Product Area, we announced that back in April .

Speaker Change: And what we discussed last quarter and what we're seeing is that unifying teams across these organizations.

Speaker Change: Helps with product execution and what we're really focused on is really adding to velocity and efficiency So kind of the gift that keeps giving and then

Ruth Porat: And then more broadly, all of the work streams that we've talked to you about before. A big one, a very important one, is all of the efficiency efforts, the work streams around technical infrastructure and improving efficiency there. We're also working on the use of AI across Alphabet. And we're working on continuing to build on what we've done with our centralized procurement organization. We're continuing to optimize our real estate portfolio.

Speaker Change: More broadly, all of the workstreams that we've talked to you about before, we continue to remain focused on. A big one, very important one, is all of the efficiency efforts, the workstreams around technical infrastructure and improving efficiency there.

Speaker Change: We're also working on the use of AI across Alphabet. We're continuing to build on what we've done with our centralized procurement organization. We're continuing to optimize our real estate portfolio. And so, again, this is across our leadership team.

Ruth Porat: And so, again, this is across our leadership team. These are efforts that all build to this phrase, durably re-engineering our cost. Great. Thank you both. And our next question comes from Doug Anmuth with JPMorgan. Your line is now open.

Speaker Change: Efforts that all build to this phrase, durably re-engineering our cost base.

Speaker Change: Great. Thank you both.

Speaker Change: And our next question comes from Doug Anmuth with JPMorgan. Your line is now open.

Douglas Anmuth: Thanks for taking questions, one for Ruth and one for Sundar. Ruth, you've now had Google services operating margins of roughly 40% for the past two quarters. Just as you create more capacity to help offset future investments, is it reasonable to think that you could sustain at those kinds of levels going forward? And then Sundar, just as it relates to AI overviews, you talked about the positive trends there. Can you just help us understand where you are, how far along you are in rolling out AI overviews, and then any more color around kind of click-through rates and monetization levels relative to your traditional searches? Thanks.

Douglas Anmuth: Thanks for taking questions. One for Ruth and one for Sundar. Ruth, you've now had Google services operating margins of roughly 40% for the past two quarters. Just as you create more capacity to help offset the future investments, is it reasonable to think that you could sustain at those kind of levels going forward?

Speaker Change: And then, Sundar, just as it relates to AI overviews, you talked about the positive trends there. Can you just help us understand where you are, how far along in rolling out AI overviews, and then any more color around kind of click-through rates and monetization levels relative to your traditional searches? Thanks.

Ruth Porat: So in terms of the Google services operating margin, you know, it did reflect all the work that we're doing on durably reengineering the cost base, but it also reflected the benefit of strong revenue performance in search. And so what I tried to lay out in the comments as we look forward to the third quarter is that operating margins will reflect the increases in depreciation and expenses associated with higher levels of our investment in technical infrastructure.

Speaker Change: So in terms of the Google services operating margin, you know, it did reflect all the work that we're doing on durably re-engineering the cost base. It also reflected the benefit of strong revenue performance in search. And so what I tried to lay out in the comments...

Speaker Change: As we look forward to the third quarter is operating margins.

Speaker Change: It will reflect the increases in depreciation and expenses associated with higher levels of our investment in technical infrastructure. It will also reflect...

Ruth Porat: It will also reflect higher expenses associated with the pixel launch due to the pull forward. So those are important factors. You know, overall, company-wide, it's important to note that we do expect to continue to deliver full year 24 Alphabet operating margin expansion relative to 2023, but I did want to highlight those important points as we look forward to Q3. And Doug, thanks.

Speaker Change: higher expenses associated with the PIXL launch due to the pull forward.

Speaker Change: So those are important factors, you know, I would say overall company-wide, it's important to note that we do expect to continue to deliver full year 24 Alphabet operating margin expansion relative to 2023, but did want to highlight those

Sundar Pichai: On the AI overviews, you know, we are, you know, we have rolled it out in the U.S., and we are, you know, we'll be, through the course of the year, definitely scaling it up, both. We have taken a conservative start, focused on quality, making sure the metrics are healthy, and so on. What you will see is expand the use cases around it, and we'll touch definitely more queries. All the feedback we have seen is positive. On the monetization side, I think Philipp has touched upon it. Maybe Philipp, anything more you want to add there?

Speaker Change: important points as we look forward to Q3

Speaker Change: And Doug, thanks. On the AI overviews, you know, we are, you know, we've rolled it out in the U.S., and we are, you know, will be through the course of the year definitely scaling it up, both

Speaker Change: Go to more countries and also, you know, we have taken a conservative start, focused on quality.

Speaker Change: making sure the metrics are healthy, you know, and so on. So, what you will see is expand the use cases around it and, you know, we'll touch definitely.

Philipp Schindler: More, more queries. All the feedbacks we have seen are positive and on the monetization side, I think, you know, Philipp has touched upon it. Maybe Philipp, anything more you want to add there?

Philipp Schindler: Yeah, yeah, look, innovation and improvements to the user experience on search have historically opened up new opportunities for advertisers. We talked about this before. We saw this when we moved from desktop to mobile, for example, and we can see Gen AI obviously expanding the types of questions we can help people with, as Sundar mentioned. And, as we said before, people are finding ads either above or below AI overviews helpful. We have a solid baseline from which we can innovate.

Philipp Schindler: Yeah, look, innovation and improvements to the user experience on search have historically opened up new opportunities for advertisers. We talked about this.

Philipp Schindler: Before, we saw this when we navigated from desktop to mobile, for example. And we can see Gen AI obviously expand the types of questions. We can help people with, as Sundar mentioned. And as we said before, people are finding ads either above or below AI Overviews helpful. We have a

Philipp Schindler: And as you may have noticed at GML, we announced that soon we'll actually start testing search and shopping ads in AI overviews for users in the US, and they will have the opportunity to actually appear within the AI overview in a section clearly labeled as sponsored when they're relevant to both the query and the information in the AI overview, really giving us the ability to innovate here and take this to the next level. Thank you. Best of luck, Ruth, in your new role.

Philipp Schindler: Solid Baseline here from which we can innovate. And as you have probably noticed at GML, we announced that soon we'll actually start testing search and shopping ads in AI overviews for users in the US, and they will have the opportunity to actually appear within the AI overview in a section clearly labeled as sponsored when they're relevant to both the query and the information in the AI overview, really giving us the ability to innovate here and take this to the next level.

Philipp Schindler: Thank you. Best of luck, Ruth, in your new role. Thank you.

Michael Nathanson: Thank you. Our next question comes from Michael Nathanson with Moffitt. Please go ahead. Thanks. I have two.

Philipp Schindler: Our next question comes from Michael Nathanson with Moffitt. Please go ahead.

Sundar Pichai: One for Sundar, one for Philipp. Sundar, on the decision this week to not deprecate cookies. I know it's been a long journey. Can you talk a bit about what we should expect in terms of your experience in Chrome and why the company made the decision not to go down a path of deprecating cookies? And then Philipp, I know it's only one quarter, but it's interesting that search is growing faster than YouTube, which surprised some of us.

Michael Nathanson: Thanks. I have two. One for Sundar and one for Philipp. Sundar, on the decision this week to not deprecate cookies...

Michael Nathanson: I know it's been a long journey, can you talk a little bit about what we should expect in terms of your experience in Chrome and why the company made the decision not to go down a path of jeopardy and cookies and then

Michael Nathanson: Phillip, I know it's only one quarter, but it's interesting that search is growing faster than YouTube, which surprised some of us. But can you talk about what factors you think are behind the differences in growth rates between these markets?

Sundar Pichai: Can you talk about what factors you think are behind the differences in growth rates between these markets? And is there anything on the AI front that could see maybe reaccelerating YouTube growth as you've seen happen with search? Thanks so much, and Michael, on cookies, look, I think, obviously, you know. We are super committed to improving privacy for users in Chrome, and that was the whole focus around Privacy Sandbox, and we remain committed to the journey.

Speaker Change: And is there anything on the AI front that you could see maybe re-accelerating YouTube growth as you've seen happen with search? Thanks so much.

Speaker Change: And Michael, on cookies, look, I think, obviously, you know...

Michael Nathanson: We are super committed to improving privacy for users in Chrome, and that was the whole focus around Privacy Sandbox, and we remain committed on the journey.

Sundar Pichai: But on third-party cookies, given the implications across the ecosystems and considerations and feedback across so many stakeholders, you know, we now believe user choice is the best path forward there. And, you know, we'll both improve privacy by giving users choice, and we'll continue our investments in privacy-enhancing technologies, but it's obviously an area we will be taking feedback from the players in the ecosystem, and we are committed to being privacy-first as well. And on the second part of your question, maybe, Ruth, you want to jump in first, and then I'll take the rest if needed.

Michael Nathanson: but on third-party cookies given the implications across the ecosystems and considerations and feedback.

Speaker Change: Across so many stakeholders, you know, we now believe user choice is the best path forward there and, you know, we'll both improve privacy by giving users choice and we'll continue our investments.

Speaker Change: in privacy enhancing technologies, but it's obviously an area we, you know, we will be taking feedback from the players in the ecosystem, and we are committed to being privacy first as well.

Ruth Porat: And on the second part of your question, maybe Ruth, you want to jump in first and then I'll take the rest if needed. Absolutely. So, look, as we both noted, search revenues really reflected broad-based growth across verticals. That was led by retail, followed by financial services. I think your question really goes to the heart of the year-on-year growth comparison.

Ruth Porat: Absolutely. So, look, as we both noted, search revenues really reflected broad-based growth across verticals. That was led by retail, followed by financial services.

Ruth Porat: I think your question really goes to the heart of the year-on-year growth comparison. And, as both Philipp and I noted, we're really pleased with YouTube, the YouTube team, everything that was done. It was driven by brand, followed by direct response.

Philipp Schindler: And as both Philipp and I noted, we're really pleased with YouTube, the YouTube team, all that was done was driven by brand, followed by direct response.

Ruth Porat: And they have very strong ongoing operating metrics, which.

Ruth Porat: And they have very strong ongoing operating metrics, which Philipp will comment on. But I think the important point to note, which I tried to tease out in my opening comments, was that the deceleration in this year-on-year revenue growth for the second quarter versus the first quarter primarily reflected the tougher comparison versus the first quarter. Because at that point, as you probably recall, YouTube was lapping negative year-on-year growth in Q1 last year, and then also Q1 benefited from the extra day from leap year.

Phil: Phil will comment on. I think the important point to note, I tried to tease out in opening comments.

Phil: ...was that the deceleration in this year-on-year revenue growth for the second quarter versus the first quarter...

Phil: primarily reflected the tougher comparison versus the first quarter. Because at that point, as you probably recall, YouTube was lapping negative year on year growth in Q1 last year.

Ruth Porat: And so what you're also seeing here is with YouTube, we were anniversarying the ramp in APAC-based retailers that began in the second quarter last year, and there were some timing issues as well that we noted. And so there are some timing issues going on, and what we're trying to highlight is the underlying operating strength. Back to you, Philipp.

Phil: And then also Q1 benefited from the extra day from LEAP year. And so what you're also seeing here is

Speaker Change: With YouTube, we were anniversary-ing the ramp in APAC-based retailers that began in the second quarter last year.

Speaker Change: and Foreign Exchange headwinds as well that we noted. And so there's some timing issues going on, and what we're trying to highlight is the underlying operating strength. Back to you, Philip.

Philipp Schindler: Yeah, that was very comprehensive. Nothing really to add from my side here. The only thing I would say, I think, to Brian's first question on areas where things are maybe taking longer, I think, look, we are all building multimodal models. At least Gemini has been natively multimodal from the ground up, but most of the use cases today that have been unlocked have been around the tech side.

Philip: Yeah, that was very comprehensive. Nothing really to add from my side here. The only thing I would say, I think, to Brian's first question on areas where things are maybe taking longer.

Speaker Change: I think, look, we are all building multimodal models, at least Gemini has been natively multimodal from the ground up, but most of the use cases today that have been unlocked have been around the tech side.

Philipp Schindler: So in terms of getting real generative audio-video experiences working well, I think it's going to take some time. But over time, obviously, it will be deeply relevant to YouTube. And so it's an area I'm excited about in the future. Thanks all, and best to you. Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.

Speaker Change: So, in terms of...

Speaker Change: Getting real generative audio video experiences working well. I think there is still, you know, it's going to take some time, but over time, obviously, you know, it will be deeply relevant to YouTube. And so it's an area I'm excited about in the future.

Speaker Change: Thanks all, and good luck to you.

Speaker Change: Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.

Eric Sheridan: Thanks so much, and I'll echo the thanks to Ruth for all the insights and partnership over the years on these earnings calls. Sundar, maybe first for you, in terms of cloud and bringing AI to the enterprise, I wanted to know if you'd go a little bit deeper in terms of how you're seeing AI actually get adopted and implemented, and what it potentially could mean for the strategic positioning of the cloud business and the potential for AI workloads to be a stimulant to revenue growth for cloud first.

Eric Sheridan: Thanks so much and I'll echo the thanks for Ruth for all the insights and partnership over the years on these earnings calls. Sundar, maybe first for you, in terms of cloud and bringing AI to the enterprise, I wanted to know if you go a little bit deeper in terms of how you're seeing AI actually get adopted, implemented, what it potentially could mean for the strategic positioning of the cloud business and the potential for AI workloads to be a stimulant to revenue growth for cloud first. And then following up, the last set of questions on YouTube are really about the macro or the ad environment. Would you guys as a team continue to learn about the subscription side of YouTube and the appetite for consumers to engage with a broader array of media products at the subscription layer? Thanks.

Eric Sheridan: And then following up, the last set of questions on YouTube were really about the macro or the ad environment. Would you guys as a team continue to learn about the subscription side of YouTube and the appetite for consumers to engage with a broader array of media products at the subscription layer? Thanks.

Sundar Pichai: Thanks, Eric. Look, on the cloud and AI stuff, you know, obviously, it's something which I think will end up being a big driver over time. I mentioned in my opening remarks already that if you take a look at our AI infrastructure and generative AI solutions for cloud, across everything we do, you know, be it, you know, compute on the AI side, the products we have through Vertex AI, you know, Gemini for Workspace, and Gemini for Google Cloud, etc., you know, we definitely are seeing traction. People are deeply engaging with the Gemini models across Vertex and AI Studio We now have over 2 million developers playing around with these things.

Sundar Pichai: Thanks, Eric. Look, on the cloud and AI stuff, you know, obviously,

Speaker Change: You know, it's something which I think will end up being a big driver over time. I mentioned in my opening remarks.

Speaker Change: Already, if you take a look at our AI infrastructure and generative AI solutions for cloud, across everything we do, you know, be it, you know, compute on the AI side.

Speaker Change: The products we have through Vertex AI, you know, Gemini for Workspace.

Speaker Change: and Gemini for Google Cloud, et cetera. You know, we definitely are seeing traction.

Speaker Change: People are deeply engaging with the Gemini models across Vertex and AI Studio. We now have over 2 million developers playing around with these things.

Sundar Pichai: And, you know, you are definitely seeing early use cases. But I think we are in this phase where we have to really hard work, you know, and make sure that in these use cases, on these workflows, we are driving deeper progress and unlocking value, which I'm very bullish will happen. But, you know, these things take time.

Speaker Change: and and you know you are definitely seeing early use cases but I think we we are in this phase where we have to deeply work

Speaker Change: and make sure on these use cases, on these workflows, we are driving deeper progress and unlocking value, which I'm very bullish will happen, but these things take time. So, but if I were to take a longer term outlook,

Sundar Pichai: So, but if I were to take a longer-term outlook, I definitely see a big opportunity here. And I think particularly for us, given the extent to which we are investing in AI, our research infrastructure leadership, all of that translates directly. And so, you know, I'm pretty excited about the opportunity space ahead. And then on your second question with respect to subscriptions, which is kind of implicit in your question, how strong is it?

Speaker Change: I definitely see a big opportunity here.

Speaker Change: And I think particularly for us, given the extent to which we are investing in AI, our research infrastructure, leadership, all of that translates directly. And so, you know, I'm pretty excited about the opportunity space ahead.

Speaker Change: And then on your second question with respect to subscriptions.

Ruth Porat: As I noted in my opening comments, the overall line, subscriptions, platforms, and devices delivered healthy growth, and that was led by subscriptions. And as we've said on many calls here in a row, subscription revenue growth continued to be quite strong, driven by subscriber growth in both YouTube TV and YouTube Music Premium.

Speaker Change: I'm implicit in your question how strong is it. As I noted in opening comments that overall line subscriptions platforms and devices delivered

Speaker Change: Healthy Growth. And that was led by subscriptions. And as we've said on many calls here in a row, the subscription

Speaker Change: Revenue growth continued to be quite strong. It was driven by subscriber growth in both YouTube TV and YouTube Music Premium.

Ruth Porat: And then the other component within that line is Google One, which also delivered strong subscriber and revenue growth. I think the heart of your question is really around YouTube, and that is the heart of the revenues in that line. So it continues to be very strong. We see a lot of take-up for it, strong subscriber growth, and we're really pleased with it. We did note that growth on that line decelerated due to anniversarying this YouTube TV price increase.

Speaker Change: And then the other component within that line is Google One that also delivered strong subscriber and revenue growth. I think the heart of your question is really around YouTube, and that is the heart of the revenues in that line. So it continues to be very strong. We see a lot of...

Speaker Change: Take-up in it, strong subscriber growth, really pleased with it. We did note that growth on that line decelerated due to anniversarying this YouTube TV price increase, but at the heart of it are people interested in the subscription offerings and is the take-up significant. We're really pleased with it.

Ruth Porat: But at the heart of it are people interested in the subscription offerings, and there's been a significant take-up. We're really pleased with it. Thank you. Our next question comes from Ross Sandler with Barclays. Your line is now open.

Ross Sandler: Hi everybody. Just two questions on the AI CapEx. So it looks like, from the outside at least, that the hyperscaler industry is going from kind of an underbuilt situation this time last year to, Transcripts provided by Transcription Outsourcing, LLC. Do you think that the AI industry is close to or far away from hitting some kind of wall on foundation model improvement in AI training based on the like lack of availability of new data? Thanks, Ross. I think these are great questions.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Ross Sandler with Barclays. Your line is now open.

Ross Sandler: Hi everybody. Just two questions on the AI CapEx. So it looks like, from the outside at least, that the hyperscaler industry is going from kind of an underbuilt situation this time last year to

Ross Sandler: better meeting the demand with capacity right now to potentially being overbuilt next year if these CapEx growth rates keep up. So do you think that's a fair characterization and how are we thinking about?

Ross Sandler: The return on invested capital with this AI CapEx cycle and then related to that

Speaker Change: Do you think that the AI industry is close to or far away from hitting some kind of wall on foundation model improvement?

Speaker Change: in AI training based on like lack of availability of new data to train on. Just your thoughts on that would be great. Thank you.

Sundar Pichai: Look, I, obviously, we are, you know, at an early stage of what I view as a, you know, very transformative area. And in technology, when you're going through these transitions, aggressively investing up front in a defining category, particularly in an area in which in a leveraged way, cuts across all our, all our core areas, our products, including search, YouTube and other services, as well as fuels growth in cloud, and supports the innovative long term bets and other bets, you know, you know, it's definitely something for us make sense to lean in.

Speaker Change: Thanks, Ross. I think, good, great questions. Look, I...

Speaker Change: Obviously, we are, you know,

Speaker Change: at a early stage of what I view as a, you know, very transformative area and in technology when you're going through these transitions, aggressively investing up front in a defining category, particularly in an area in which in a leveraged way.

Speaker Change: cuts across all our core areas, our products, including Search, YouTube, and other services.

Speaker Change: As well as fuels growth in cloud and supports the innovative long-term bets and other bets, you know, you know, it's definitely something for us make sense to lean in. You know, I think, you know, the one way I think about it is when you go through a curve like this.

Sundar Pichai: You know, I think, the one way I think about it is when you go through a curve like this, the risk of under investing is dramatically greater than the risk of over investing for us here, even in scenarios where. You know, if it turns out that we are over-investing, we clearly, these are infrastructures which are widely useful for us. They have long, useful lives, and we can apply them across, and we can work through that. But I think, you know, not investing to be at the frontier definitely has much more significant downsides.

Speaker Change: The risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where...

Speaker Change: You know, if it turns out that we are over-investing, we clearly, these are infrastructure which are widely useful for us, they have long useful lives, and we can apply it across and we can work through that.

Speaker Change: But I think, you know, not investing to be at the frontier, I think, you know, definitely has.

Sundar Pichai: Having said that, we obsess around every dollar we put in. Our teams work super hard, and I'm proud of the efficiency work, be it optimization of hardware, software, model deployment across our fleet. All of that is something we spend a lot of time on, and that's how we think about it. To your second question, you know, on whether the scaling laws hold.

Speaker Change: much more significant downsides. Having said that...

Speaker Change: We obsess around every dollar we put in. Our teams work super hard, and I'm proud of the efficiency work, be it optimization of hardware, software, model deployment across our fleet. All of that is something we spend a lot of time on, and that's how we think about it.

Sundar Pichai: Are we hitting some kind of wall or something? Look, I think we are all pushing very hard, and you know, there's going to be a few efforts that will scale up on the compute side and push the boundaries of these models. What I would say is, regardless of how that plays out, you know, I still think... There are enough optimizations we are all doing, which is driving constant progress in terms of the capabilities of the models.

Speaker Change: To your second question, you know, on, you know, whether, how do the scaling laws hold? Are we hitting on some kind of wall or something? Look, I think...

Speaker Change: We are all pushing, pushing very hard and you know, there's going to be a few efforts.

Speaker Change: which will scale up on the compute side and push the boundaries of these models. What I would tell is, regardless of how that plays out, you know, I still think

Speaker Change: There is enough optimizations we are all doing, which is driving constant progress in terms of the capabilities of the models. And more importantly,

Sundar Pichai: And more importantly, taking them and translating them into real use cases across the consumer and enterprise side, I think on that frontier, there is still a lot of progress to be had. And so, you know, we are pretty focused on that as well. Thank you. Our next question comes from Stephen Ju with UBS. Your line is now open. Okay. Thank you so much.

Speaker Change: taking them and translating into real use cases across the consumer and enterprise side. I think on that frontier, I think there's still a lot of progress to be had. And and so, you know, we are pretty focused on that as well. Transcribed by https://otter.ai

Speaker Change: Thank you.

Speaker Change: Our next question comes from Stephen Ju with UBS. Your line is now open.

Stephen Ju: So Sundar, to ask the AI question another way, you know, as we talk to some of the model builders out there, it looks like the initial use cases are more on the cost savings or efficiency side. But, you know, when do we, when do you think we'll start thinking about products that can help revenue generation for Fortune 500 and Fortune 1000 companies, which is probably something that can hopefully create greater value over time versus just cutting costs?

Stephen Ju: Okay, thank you so much. So Sundar, I guess to ask the AI question a different way, you know, as we talk to some of the model builders out there, it looks like the initial use cases are more on the cost savings or

Speaker Change: Efficiency side, but you know, when do we, what do you think we'll start thinking about products that can help revenue generation for the Fortune 500, Fortune 1000 companies, which is probably something that can hopefully create greater value over time versus just cutting costs.

Stephen Ju: And Philipp, listening to what will be, I guess, Ruth's final comments on YouTube about these public calls, and thank you, by the way, Ruth, for all the help, I couldn't help but notice that the bigger factors were brands followed by direct response. And, you know, if we continue to think that the one you bring up first is the larger factor, and tie this into your prior commentary about shopping being an important consideration, when do you think we'll start talking about direct response being a much bigger contributor to YouTube's growth versus brand?

Philipp Schindler: And Philipp, listening to what will be, I guess, Ruth's final comments on YouTube on these public calls, and thank you, by the way, Ruth, for all the help, I couldn't help but notice that the bigger factors were brand followed by direct response, and

Speaker Change: If we continue to think that the one you bring up first is the larger factor, and tying this into your prior commentary about shopping being an important consideration, when do you think we'll start talking about direct response being a much bigger contributor to YouTube's growth versus brand? Thank you.

Stephen Ju: Thank you. On the first part of the question, look, I think, the technology is horizontal enough, you know, it can apply on both sides, you know, if you take a use case like, improving the customer service experience is part of it, which is driving efficiencies. And you can look at it from a cost standpoint. But, you know, you could also be overall improving the experience, improving conversion, driving the funnel better, and so increasing basket size if you're a retail e-commerce player, et cetera. So, you know, we are seeing people experiment across both sides, and, you know, and so I think you will see it play out across both sides. Philipp, on the second one.

Speaker Change: I think the technology is horizontal enough, it can apply on both sides, if you take a use case like...

Speaker Change: Improving the customer service experience is part of it, which is driving efficiencies, and you can look at it from a cost standpoint.

Speaker Change: But you know, you could also be overall improving the experience, improving conversion, driving the funnel better.

Speaker Change: and so increasing basket size if you're a retail e-commerce player, etc. So we are seeing people experiment across both sides and so I think you will see it played across both sides. Philipp, on the second one.

Philipp Schindler: Yes, on the second one, look, on the direct response side, as you know, it's about driving and converting commercial intent. And customers are obviously benefiting from including video in their AI-powered campaigns, such as PMax, DemandGen, and obviously using our automated tools to enhance and create video creatives. And we're very, very optimistic about this path. On average, advertisers who run both image and video ads with DemandGen campaigns see 6% more conversions per dollar than those running image-only ads and discovery.

Philipp Schindler: Yes, on the second one, look, on the direct response side, as you know, it's about driving.

Philipp Schindler: and Converting Commercial Intent. Customers are obviously benefiting from including video in their AI-powered campaigns. It could be PMax, it could be DemandGen.

Speaker Change: and obviously using our automated tools to enhance and create video creatives and we're very very

Speaker Change: Optimistic about this path. On average, advertisers who run both image and video ads with demand gen campaigns see 6% more conversions per dollar than those running image-only ads and discovery. And this is just one little example of how this can obviously boost your performance business. So that's a big part. The brand side, as you know, Google AI continues to make it easier for brands to show up next to the content where reviewers are obviously the most engaged. And they're finding it, as you can see from the numbers, a very effective way to drive awareness.

Philipp Schindler: And this is just one little example of how this can obviously boost your performance business. So that's a big part. On the brand side, as you know, Google AI continues to make it easier for brands to show up next to the content where reviewers are obviously the most engaged. And they're finding it, as you can see from the numbers, a very effective way to drive awareness and consideration. We're also quite excited about some of the recent launches on the YouTube shopping site, if you want to put that into the direct response bucket. Okay, thank you. And our last question comes from Justin Post with Bank of America. Your line is now open.

Speaker Change: and Consideration. We're also quite excited about some of the recent launches on the YouTube shopping site if you want to put that into the direct response bucket.

Speaker Change: Okay, thank you.

Speaker Change: And our last question comes from Justin Post with Bank of America. Your line is now open.

Justin Post: Great. I'd like to ask you a couple of questions. First, on cloud acceleration, would you characterize that as new AI demand helping drive that year-to-date, or is that more of a rebound in just general compute and other demand, or is AI really moving this forward and helping drive acceleration? And then I wanted to ask about your internal cost savings, which have been really strong. How are you using AI internally to help cut costs? Are you seeing better efficiency with your engineers? And I just would love to hear about how you're applying AI to cut your own costs.

Justin Post: Great. I'd like to ask a couple areas. First, on the cloud acceleration, would you characterize that as new AI demand helping drive that year-to-date, or is that more of a rebound in just general compute and other demand, or is AI really moving this forward and helping drive acceleration? And then I wanted to ask about your internal cost savings, which has been really strong. How are you using AI internally to help cut costs? Are you seeing better efficiencies with your engineers? And just would love to hear about how you're applying AI to cut your own costs. Thank you.

Ruth Porat: So, overall, as both Sundar and I said, we're very pleased with the results in cloud. And there is clearly a benefit as the cloud team is engaging broadly with customers around the globe with AI-related solutions, AI infrastructure solutions, and generative AI solutions. I think we're particularly encouraged that the majority of our top 100 customers are already using our generative AI solution.

Speaker Change: Great, thank you for that. So overall, as both Sundar and I said, we're very pleased with the results in cloud.

Speaker Change: And there is clearly a benefit as the cloud team is engaging broadly with customers around the globe with AI-related solutions, AI infrastructure solutions and the generative AI solutions.

Speaker Change: I think we noted that we're particularly encouraged that the majority of our top 100 customers are already using our generative AI solution, so it's clearly adding to...

Ruth Porat: So, it is clearly adding to the strength of the business on top of all that they're doing. And just to be really clear, the results for GCP, the growth rate for GCP is above the growth for cloud overall. And then I'll turn it to Sundar on the cost saving point.

Speaker Change: The strength of the business on top of all that they're doing, and just to be really clear, the results for GCP, the growth rate for GCP is above the growth for cloud overall.

Sundar Pichai: But just one point, you know, we're really pleased as well that Cloud's margin improved as it did. And in part, that reflects the revenue strength that they delivered and all of the efficiency efforts that I've already spoken about. But looking ahead in Q3, we do expect the same seasonal pattern that you saw last year with respect to margin.

Speaker Change: And then I'll turn it to Sundar on the cost-saving point, but just one point, you know, we're really pleased as well that cloud's margin improved as it did, and in part that reflects the revenue strength.

Sundar Pichai: that they deliver and all of the efficiency efforts that I've already spoken about. But looking ahead in Q3, we do expect the same seasonal pattern that you saw last year with respect to margin and we are continuing to invest in the business.

Ruth Porat: And we are continuing to invest in the business. Look, I think specifically, you know, if the question is about engineers and coding, et cetera, you know, we definitely want to be on the cutting edge there. I think we are making these tools available to some of the most, you know, productive engineers and demanding engineers out there, and they are definitely kicking the tires hard. And but I would say it's still all in the very early stages, particularly when it comes to writing high quality, secure code.

Sundar Pichai: Look, I think specifically, you know, if the question is about engineers and coding, et cetera, you know, we definitely want to be on the cutting edge there. I think we are making these tools available to some of the most...

Sundar Pichai: Productive engineers and demanding engineers out there and they are definitely kicking the tires hard and but I would say

Sundar Pichai: It's still all in very early stages, I think particularly when it comes to writing.

Sundar Pichai: But I think all the learnings, what we are gaining here, will translate into our models and products. And that's the virtuous cycle, which I'm excited by. So there's a lot more to come.

Sundar Pichai: High Quality Secure Code. But I think all the learnings, what we're gaining here, will translate into our models and products, and that's the virtuous cycle, which I'm excited by. So there's a lot more to come.

Operator: Great, thank you. Thank you, and that concludes our question and answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks. Thanks, everyone, for joining us today. We look forward to speaking with you again on our third quarter 2024 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.

Speaker Change: Great, thank you.

Speaker Change: 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.

James Friedland: Thanks everyone for joining us today. We look forward to speaking with you again on our third quarter 2024 call. Thank you and have a good evening.

James Friedland: Thank you everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.