Good day, ladies and gentlemen and welcome to the Alphabet Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I'd now like to turn the conference over to Ellen West, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone and welcome to Alphabet's third quarter 2017 earnings conference call. With us today are Ruth Porat and Sundar Pichai. Now, I'll quickly cover the Safe Harbor. Some of the statements that we make today may be considered forward-looking, including statements regarding our future investments, our long-term growth and innovation, the expected performance of our businesses and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the risk factors discussed in our Form 10-K for 2016 filed with the SEC. Any forward-looking statements that we make are based on assumptions as of today and we undertake no obligation to update them. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. As you know, we distribute our earnings release through our Investor Relations website located at abc.xyz/investor. This call is also being webcast from our IR website where a replay of the call will be available later today. And now, I'll hand the call over to Ruth.

Thanks, Ellen. We had a terrific quarter. Revenues of 27.8 billion were up 24% year-on-year, and also up 24% in constant currency. Advertising revenues benefited from strong performance in sites, which was powered by tremendous results in mobile search. Healthy growth in network revenues was again led by our programmatic business. We also benefited from substantial growth in other revenues from cloud, play and hardware. Our outline for today's call is, first, I'll view the quarter on a consolidated basis for Alphabet, focusing on year-over-year changes. Next, I will review results for Google and then Other Bets. Finally, I will conclude with our outlook. Sundar will then discuss business and product highlights for the quarter, after which we will take your questions. Let me start with a summary of Alphabet's consolidated financial performance for the quarter. Total revenues were $27.8 billion, up 24% year-over-year. We realized a positive currency impact on our revenues year-over-year of $255 million or $64 million after the impact of our hedging program. Holding currency constant to the prior period, our total revenues grew 24% year-over-year. Turning to Alphabet revenues by geography; performance was strong in all regions. U.S. revenues were $12.9 billion, up 21% year-over-year. EMEA revenues were $9.1 billion, up 23% year-over-year in both reported and fixed FX terms. APAC revenues were $4.2 billion, up 29% versus last year and up 31% in fixed FX terms. Other Americas revenues were $1.5 billion, up 33% year-over-year and up 32% in fixed FX terms. On a consolidated basis, total cost of revenues, including TAC, which I'll discuss in the Google segment results, were $11.1 billion, up 28% year-on-year. Other cost of revenues on a consolidated basis was $5.6 billion, up 25% year-over-year, primarily driven by Google-related expenses. Specifically, costs associated with operating our data centers, including…

Thank you, Ruth. We had another great quarter. I've been really proud of the progress this quarter, launching popular new products and continuing to grow our business in new areas. It's been particularly exciting to see our early bet on artificial intelligence pay off and go from a research project to something that can solve new problems for a billion people a day. Even though we are in the early days of AI, we are already rethinking how to build products around machine learning. It's a new paradigm compared to mobile-first software, and I'm thrilled how Google is leading the way. Consumers can already experience how AI allows them to interact with computing more naturally than ever before. Computers are adapting to people rather than people needing to adapt to computers. Fundamental to this experience is Google Search and our Assistant. We introduced Assistant last year and it continues to get better every day, helping people get things done in the real world. Walmart and Target have recently integrated with Google Home, which means you can order everyday items from them much more easily. 500 million people now use the machine learning smarts of Google Photos to manage and share their memories. That billion plus people using Google Maps now get thoughtfully contextual information like how to find parking where they are going. And businesses are seeing how AI can help them grow. Our open-source software, TensorFlow, is allowing anyone to use machine learning to solve problems even in industries like agriculture. Researches recently use TensorFlow to make smartphones able to identify disease in cassava plants, a major food source in the developing world. We made TensorFlow open-source and free because we fundamentally believe in creating computing platforms that developers can customize and build on. I'm really pleased with the…

Thank you, Sundar. And we will now take your questions.

And our first question comes from the line of Eric Sheridan of UBS. Your line is now open.

Thanks for taking the question. Maybe two, if I can. One, we've seen a lot of partnership announcements intra-quarter on the e-commerce side with Google Express and voice assisted shopping on Google Home. Wanted to understand better your ambitions in e-commerce as a marketplace or a platform and how that might also feed back into the advertising business? Second question would be about the cash on the balance sheet and sort of how philosophically you think about deploying that cash against either shareholder returns or some of the big opportunities you laid out today? Thank you.

Maybe I'll take the first question and give it to Ruth on the cash question. We are very excited about the partnerships we are getting here with large retailers, and we are seeing traction globally. We've obviously partnered with them through our advertising products. But with shopping, especially as we move on to making shopping more seamless across mobile and newer computing categories like Google Home, I think there's tremendous interest here. So we are just getting started. And I think you will see us make a lot more progress and have a lot more announcements. And I think we are going to be relentlessly focused on making the buying experience much more seamless for users. So there's a lot more to come.

So in terms of your second question. There was really no change from the approach we've talked about previously as we think about capital allocation. The priority is organic, as you said in your question. We have a host of really exciting opportunities and ensuring that we're investing to support long-term growth remains number one. The second is strategic, continuing to add on where it makes sense. We're pleased to have added on HTC this quarter. Acquisitions have obviously been an important part of our history. And then the third is the return of capital and no change or update there in terms of how we think about that.

Thank you.

Thank you. And our next question comes from Mark Mahaney of RBC Capital Markets. Your line is now open.

Great, thanks. Two questions, please. Sundar, you talked about APAC. You called out Asia. And we noticed that too, that that year-over-year growth rate was higher than – it was the highest, at least since you've been disclosing that. And you provided some of whats, but any whys behind why that growth is accelerating? Is that something that has just naturally reached the tipping point? Is there something different that Alphabet/Google has done in Asia to accelerate that growth? And then, Ruth, can I ask you. You talked about the factors driving TAC and you mentioned changes in partner agreements. Is there any way you could give us any more color? Did you just renew some major partner agreements and there's nothing of that magnitude into next year? Or should we just assume that this is just part of operations, there was nothing major recent, you could have major ones coming up? Just something to help us qualify – I don't you think you'd used that language before – what that indicated? Thanks a lot.

The Asia question, largely, I think we've been laying a foundation for a very, very long time. Our products are very heavily used there. And so we've worked hard to build a user base and then the mobile transformation is a secular shift there. That's definitely driving accelerated growth. And it creates a virtuous cycle. We see new advertisers coming on. We are investing more in Asia as well in addition to our go-to-market teams. We are building out great product and engineering teams. That's what has led us to improve core products like Search, Maps, YouTube, et cetera, to work better in those regions. And also launched region-specific products like Google Tez in India. So I think, overall, that's creating a good virtuous cycle and I'm looking forward to having more momentum there.

And on your TAC question, as I indicated in the opening comments. There are a couple of drivers here. One is changes in partner agreements. And I think the main point is we're very pleased with our strong partnerships across the mobile ecosystem. And the other was the ongoing shift to mobile, which we've talked about a lot and the fact that it carries higher TAC because more mobile searches are channeled through paid access points. I think the most important point is that what you're seeing is we have a very healthy mobile business, search business and it is growing substantially and our focus remains on long-term revenue and profit dollar growth.

Okay. Thank you.

Thank you. And our next question comes from Douglas Anmuth of JPMorgan. Your line is now open.

Thanks for taking the question. I had two. First, Ruth, you talked about the ongoing advertising innovation, and it's pretty clear that that's happening in mobile, which seems like it probably accelerated in the quarter. So I was hoping if you could comment on that. But then also, how do you think about where you are in terms of optimization on mobile relative to desktop? And then just second on YouTube. I was hoping you could comment on the extent to which you're seeing marketers return to the platform post the brand safety issues of 2Q and for a few of those who may not be back on yet, what are they looking for to fully return? Thanks.

So it felt like a number of calls talked about the fact that there was no one item that was driving the momentum we saw in our sites revenue, and that was the point of giving you a bit more color here. We are really pleased with the momentum in the business, excited about the opportunities we have given the ongoing strong underlying secular trend, but wanted to give you more color on what do we mean by a culture of innovation, and that's really why I tried to get into a bit more about the rigor of the process. And one of the key points is that we do have the opportunity, and we anchor this indeed, that we're constantly challenging assumptions. We're running a lot of experiments to enhance user and advertiser experience. And the approach continues to be productive, especially because the line of inquiry evolves as user behavior evolves. And so what users wanted in the earlier days of smartphones when screens were smaller is obviously, very different from expectations users have today. Each quarter, the ads team introduces more than 100 enhancements out of a much larger pool of assumptions that they've tested. Machine learning is at the center of our processes and systems. And we do remain excited about the potential. Desktop, I commented on. We are pleased with the ongoing strength of the business. It delivered solid revenue growth that remains an important form factor for certain more complex tasks. We've talked about that in prior quarters. Things like planning vacations or assessing insurance options. And so I think with the strength here underscores the importance of desktop for many users in many task, notwithstanding, the growing utility of mobile for users. And then in terms of YouTube, I think you asked it. Well, we've been doing a lot to protect the ecosystems and do the right things for advertisers and users and content creators and the overwhelming majority of advertisers never left and those who did, many are already back on the platform.

Thank you, Ruth.

Thank you. And our next question comes from Heather Bellini of Goldman Sachs. Your line is now open.

Thank you so much. Sundar, I was wondering if you could share with us your thoughts on voice search. And I guess, in particular, how do you think about maintaining Google fleet as the way we search changes, and as we see increasing adoption of these voice-enabled digital assistance in the home? And part of it, I guess, I'm also wondering about is how do you think about your relationships with the partners? And if the device base broadens out, does your leverage with the partners change? Thank you.

It's a good question, Heather. Voice, it's important to remember, voice is one input. When you look at how customers interact, they obviously are interacting more and more naturally, seamlessly across a set of screens, computing works and context for them. And even then when they asked voice queries, the response always what they need is not voice alone. Think about walking into a store and if you could only ask using voice and the person has to reply in voice what all is in the store. So that model applies. So we expect a lot of continual experiences across screens, across modalities. So it's a big opportunity. I think it's opening up newer ways in which we are working with partners. I spoke earlier about the kind of experiences we are now able to drive at Walmart and Target, which we could have done a year before. Thanks to voice, how we are using it in the Google Assistant and how we are driving these partnerships. So there's a lot of excitement about how we can do all of this differently. So we are using this as a good way to rethink everything we are doing with the caveat that voice still, overall, is an emerging category compared to how users use our products. So there's a lot of room ahead.

Thank you.

Thank you. And our next question comes from Justin Post of Merrill Lynch. Your line is now open.

Hey, I like to – maybe discuss a couple of your growth businesses. First, on cloud. Maybe you could talk about some of the wins you're seeing and why people are necessarily choosing Google and the momentum there? And then, secondly, on the hardware business. It feels a little confusing on what your real goal is there. Is that to build a real independent separate hardware business? And how the Android relationships are going around that? Thank you.

First on cloud. Effectively, we are seeing strong momentum. And we already hear from customers that we have outstanding technology. So the reason we win deals in many cases is because we have superior technology and people also see the room ahead, thanks to a lead in machine learning. And that's an area where I think we'll continue to drive advantage. The main area where we need to get better is to scale our go-to-market and be in more places to effectively get more customers. And we are doing that a few different ways, Diane and team have really skilled our global sales force. But more importantly, I think we are striking a lot of important partnerships with leading technology vendors to scale and reach more customers. And so be the partnership at Cisco that we announced or, in this quarter, we also teamed up with Pivotal and VMware. And earlier the year, you saw us partner with SAP. And all of this help customers more easily run their apps, both on-prem and in the cloud. And we are doing this all in a open way with Kubernetes. So that's the overall strategy, and I think that's really beginning to pay off. And you will see us scale across all these dimensions for cloud in the year ahead. In terms of hardware, we are very seriously committed to making hardware. Few reasons. Hardware is – the intersection of hardware and software is how you drive computing forward. And historically, hardware has been maybe a single device business. For a long while, it was PCs then maybe plus smartphones. But you're clearly entering an era where you going to have different types of computing experiences. And so to do that and to stitch it all together across, I think it's important we thoughtfully put our opinion forward. We're equally committed to working with the ecosystems and we provide the same basis on both sides, be it Android or Chrome. And it's going really well. Our close partnership this quarter across a set of Android partners. You see great momentum at the recently launched Samsung Note 8. We announced ARCore on Samsung devices. So we have strong momentum there as well. So we're committed to pushing forward hard on all these areas.

Thank you.

Thank you. And our next question comes from Ross Sandler of Barclays. Your line is now open.

Hi. I had a question for either Sundar or Ruth. It's just a philosophical question on TAC. So as the mobile search market matures, particularly in the Western markets, the question is, why does Google feel like it needs to pay any TAC to partners at all? Is the lesson learned from the Firefox, desktop partner loss a couple of years ago was that you didn't lose any revenue and you stopped paying TAC on that agreement, why wouldn't the same logic apply to mobile search? If not now, at some point in the future?

Look, I mean, first of all, we have a lot of experience in this area. We've been doing distribution deals for our search for well over a decade and I personally been involved all the way from the toolbar in the Chrome days. So by now, first of all, we want to construct a win-win construct. So we always want to construct in which we do better when our partners to better. And so doing TAC well aligns us in that way and, historically, it has driven a lot of growth. And so it's a model we understand. We understand the key economics behind it. And so we are very thoughtful about how we drive it forward. So we are driving it forward in a way in which we know it's going to give strong both revenue and earnings growth. And so I think we are pretty comfortable with how we are approaching it and so we'll continue to do that.

Thank you. And our next question comes from Brian Nowak of Morgan Stanley. Your line is now open.

Thanks for taking my questions. I have two. Just the first one, a little bit on growing Alphabet's multi-app ecosystem. Sundar, how do you think about the strategic importance to drive Chrome and Google Assistant app installs and user growth on non-Android mobile platforms? Maybe talk about how you evaluate, how you're doing there so far? And then bigger picture. You've made large and exciting investment in growth opportunities across Google and Other Bets. I'd be curious to hear philosophically, how do you evaluate these opportunities and talk about some of the ROI thought processes or evaluation you make when making large capital allocation decisions?

So, on the first one. One of the unique things about how we approach product development is we've always, at Google, care about building our products for everyone. And be it Search or Gmail or Google Photos or Chrome, we work hard to drive it across all platforms. Obviously, some products, their ability to make it work well on other platforms versus our native platforms, there are differences and so we understand that. It's partly why we are very committed to driving success on our platforms, both through the ecosystem and our hardware efforts as well. So we think about it holistically. But you'll continue to see us put a lot of effort into other platforms as well. For example, over the past couple of years, I think we've meaningfully improved our products on iOS, as an example. On the other part, maybe Ruth, do you want to give color. I would just say, at a high level, we drive our investments because we think about it from a user perspective first. We see areas where there are clear user problems and we think about whether we can use computer science and our technology advantage as Google and Alphabet to give a differentiated offering for users. And we do that and then we think long-term. But that's how we do about it. Maybe Ruth can give more color there, too.

And then the numbers flow out of that, which is we look over a multi-year period. A lot of the things that we're doing are multi-year investments, and that's why we stress repeatedly that we're looking at what are the long-term needs and opportunities that we could be addressing, if we're doing that well, we're delivering long-term revenue and earnings growth. And those investments need to be seeded early for them to continue to grow and flourish around the globe. Whether that responds to the first question on what's going on in APAC or across Alphabet more broadly, we take a multi-year look. We look at the business, technical, financial milestones along the way, and we allocate resources in order to make sure we're maximizing the long-term potential to deliver as we see is appropriate.

Thanks.

Thank you. And our next question comes from Michael Nathanson of MoffettNathanson. Your line is now open.

Thank you. I have two for Sundar, one on HTC. It's kind of interesting thing that you didn't buy the company, but you bought talent. And I wonder, what does that move directly give you? And what did you think was lacking, I guess, from the product side before you made that move? Then I had one on YouTube.

On HTC, as we were working on our hardware efforts, we've been working with HTC very closely on the Pixel phones. So across the two companies, we saw a win-win construct, by which we could bring the team and the IP and other assets related to the Pixel business in-house. And it also allows HTC to focus better on their phones and the other products they're working on. So it just made a lot of sense to do it. And I would also think about the overall capability we are getting, not just to make phones, but as we get into other product categories, like Google Home, VR and so on, right? And so it's important to continue to build that out. And the talent we saw there is definitely best-in-class.

Okay. And then on DIRECTV – sorry, YouTube TV. It's clear that you guys have pretty good momentum, 50 markets already. I wonder, what has surprised you about the early consumer engagements? Anything you could share about early findings on the rollout of YouTube TV?

Yeah, main thing I would say is the consumer feedback, I think there's always been this promise on being able to, just like today on Google Search when you want something, we make it so easy for you to find it. Bringing that kind of a seamless experience on to TV, when you think about something you want to watch, making it seamless. And so, improving that process, I think, is really what people positively comment on. Other things are being able to personalize it, bringing our machine learning-based recommendations over time. So that's how people notice. They get content, in which they are interested in, surfaced much better. So I think given where we are, I'm really excited at the initial reception. And we are gathering a lot of feedback, bringing it to more markets, and I'm going to work hard at making the product better.

Okay. Thanks, Sundar.

Thank you. And our next question comes from Dan Salmon of BMO Capital Markets. Your line is now open.

Hi. Good afternoon, everyone. Sundar, I'd like to just follow-up on an earlier question about e-commerce and specifically, a trend we see growing across the ecosystem of applying e-commerce data to targeting advertising. Maybe if you could describe how you view that at a high level and whether that's important to you, and growing that opportunity across all of your platforms. And perhaps, shed some light on areas where you may be able to tap into that. You discussed partnerships with retailers, Android Pay. You're tracking off-line conversions more, even a product like Customer Match would seem like it'd be an opportunity to have your advertisers bring that type of data to the table. Would love to hear a little bit more about your thoughts on that?

It's a good question, Dan. You kind of partially answered it. So you're welcome to come and work on our e-commerce team anytime. To us, as a vertical, we see huge opportunities there. There's a lot of flywheel effects we see. Almost all e-commerce providers are really interested in, like, cloud for obvious reasons. So we see tremendous traction by which we are – we can talk to them about cloud. They're already advertising partners. They're beginning to work with us much more closely on driving a seamless shopping experience. We're working on payments. And so, it creates a nice flywheel effect, and we can do this globally across all the countries we do it in. And so, we are treating it more thoughtfully and investing in addressing the vertical opportunity we see in front of us, and we'll continue working on that.

Great. Thank you.

Thank you. And our next question comes from Colin Sebastian of Robert Baird. Your line is now open.

Great. Thanks. Maybe a couple of follow-ups. First on TAC, wondering if changes in partner agreements, since those are one of the key drivers of the increase in TAC, could we then see the rate of TAC growth moderate as you anniversary those deals? And then, secondly, as it relates to voice and visual search inputs, I know it's still early for Google Lens. But overall, I'm wondering what portion of those search queries are proving to be incremental to search, the search experience, or are they largely substituting for searches on screens? Thank you.

So in terms of TAC, as I indicated, we've got a couple of things going on. We're pleased with our strong partnerships. We continue to stress the impact from the shift to mobile. And again, both Sundar and I have said it, our focus remains on the profit dollar growth. And we've got a really nice position and a strong growth area. So that's what you're seeing here. But as I also said, we do expect it to increase some from here. And you've got a couple of factors going on.

On the second thing, look, I think based on every metric we see users' information needs are only going up. And the amount of information they deal with are increasing. And as we add new modalities, it really drives a better experience for them. Google Lens, there's a long way to go. But today, as humans, visual input is really big for us. I mean, it's a lot higher bandwidth than everything else. And so bringing back to computing, I think, is a really important step in advancing how users can process information. And so I see that as an important step. And thanks to machine learning, we'll be able to do these things a lot more powerfully. All of this I think, overall, adds to the search experience. And so I view that as all incremental, but it'll play out slowly over many years. And so we see this as a big opportunity ahead and we are investing for it.

Thank you.

Thank you. And our next question comes from Brent Thill of Jefferies. Your line is now open.

Thanks. Good afternoon. The revenue growth was one of the highest growth rates you've seen in five years. I'm just curious if there was something that surprised you in the quarter or something that perhaps was an anomaly that we should be thinking about modeling going forward?

So I tried to give you a bit of color going across the major lines. We feel we're really pleased with the sites' revenue growth, the performance in mobile desktop and YouTube. I think if you just go down to the big categories, network revenue also was quite strong. I think one thing to add there is programmatic continues to be a strong contributor. Generate significant growth, we've talked about that on prior calls. Given all the ongoing advertiser adoption of programmatic buying and AdMob continues to see strength. What you're also seeing here is the traditional AdSense businesses. Overall, the pace of advertiser migration to programmatic affects this business kind of quarter-on-quarter as well as the policy changes that we've talked about in prior quarters. And those factors were less of a drag in the last couple of quarters. So you actually saw nicer revenue growth year-on-year here as well. It was up 16%. And then Sundar's talked a lot about the components of other revenues up nicely. We're really pleased with what's going on there and then, on top of that, Other Bets. So we've got a couple of components to it and tried to give you color on each one.

Thank you.

Thank you. And our final question comes from the line of Stephen Ju of Credit Suisse. Your line is now open. Stephen Ju - Credit Suisse Securities (USA) LLC Thank you. So Sundar, can you talk about how Google is positioning in the emerging markets over the longer term can be different versus what we are used to seeing here in the States. I mean, you talked about Tez in India, and that's just type of stuff that we're not even seeing here in the States. So is there a broader opportunity for you to do a larger land grab with more products? And Ruth, should we assume that the relative size of the dollar contribution to the other revenue growth happened in the order you gave out in the prepared remarks, I guess, cloud, play, hardware? And if so, this would make it the second quarter in a row in which cloud is showing up as the largest contributor, I guess, as opposed to the third. So any perspective you can share in terms of the relative growth you maybe seeing recently? Thank you.

On emerging markets, we do see a differentiated opportunity there partly because the characteristics of how truly many of these markets came mobile first, I think, gives rise to different ways users are adopting our products. And also, more importantly, the ecosystem, which is built around, so for example, if you take e-commerce, the kind of models that are emerging in these countries are also a bit different. So I think we see a way to look at these markets with a lot more thought and address them for the opportunity that they have, not just apply our global products there. So I think that's what led us to do Google Tez in India. And we'll thoughtfully look at the opportunities in that region and invest a lot in the years ahead.

And then we do – we did list them in the order in which they're making a contribution. It's obviously a mix of businesses. As we've talked about, we have very strong growth in each of cloud and hardware that was tempered by slightly slower growth in Q3 for Play, reflecting what's the hit-driven nature of that business of gaming. But again, feel really pleased with the progress, momentum that we're seeing in the various businesses. And I guess, the only other thing to notice, obviously, is seasonality on the hardware as we move into the fourth quarter here. Stephen Ju - Credit Suisse Securities (USA) LLC Thank you.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Ellen West for any closing remarks.

Thanks, everyone, for joining us today. We look forward to speaking with you again on our fourth quarter call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.