Good day, ladies and gentlemen, and welcome to the Alphabet Inc. First Quarter 2018 Earnings Call. [Operator Instructions]. 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 First Quarter 2018 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 2017 filed with the SEC. Undue reliance should not be placed on any forward-looking statements, and they are made based on assumptions as of today. 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 turn the call over to Ruth.

Thank you, Ellen. We delivered ongoing strong revenue growth, up 26% year-on-year and up 23% in constant currency. The sustained outstanding performance in sites revenues, in particular, reflects the combined benefits of innovation and secular growth, with mobile search again leading the way. Robust growth in network revenues was again led by our programmatic business. Ongoing substantial growth in other revenues, namely cloud, hardware and Play, continues to highlight the growing contribution of our non-ads opportunities. Our outline for today's call is, first, I'll review the quarter on a consolidated basis for Alphabet, focusing on year-over-year changes. Second, I will review results for Google and then Other Bets. As we highlighted in our earnings press release, our results this quarter were affected by a new accounting standard that changes the way companies account for equity security investments. I'll highlight the impact on particular line items as I review the quarter. I will then conclude with our outlook. Sundar will then discuss business and product highlights, after which we will take your questions. Starting with the summary of Alphabet's consolidated financial performance for the quarter. Our total revenues of $31.1 billion were up 26% year-over-year. We realized the positive currency impact on our revenues year-over-year of $1.3 billion or $1.1 billion after the impact of our hedging program. Turning to Alphabet's revenue by geography. You can see that our performance was strong again in all regions. U.S. revenues were $14.1 billion, up 20% year-over-year. EMEA revenues were $10.5 billion, up 29% year-over-year. In constant currency terms, EMEA grew 21%, reflecting strengthening of both the euro and the British pound. APAC revenues were $4.8 billion, up 33% versus last year and up 30% in constant currency, reflecting strengthening of the Japanese yen and Australian dollar. Other America revenues were $1.7 billion, up…

Thanks, Ruth. The end of Q1 is always an exciting time as we prepare for our annual developer conference, Google I/O. Computing is evolving at a rapid rate, and we can't wait to share what's next and how we are tackling important issues. I want to call out an important highlight from Q1, the Google news initiative that we unveiled in March. Over the years, we have worked closely with the news industry to address key challenges through projects like Accelerated Mobile Pages. We are building on that partnership with the $300 million investment to elevate and strengthen quality journalism. As part of this effort, we announced more than a dozen new products, including Subscribe with Google developed in close collaboration with publishers, which lets you use your Google account to buy a subscription on participating news sites. We've had overwhelming interest. Since the launch, we have heard from more than 300 news publishers who are interested in Subscribe with Google. We also introduced new tools for journalists and improvements to our platforms to ensure that we are surfacing accurate quality content where it matters most. Today, I'll quickly talk about how machine learning is helping us advance that mission, then I'll highlight progress in our 3 big areas, cloud, YouTube and hardware, and share updates on our computing and advertising platforms. First, machine learning and making information accessible to everyone. Our own ML-powered products like Google Photos and Google Lens gets better every day. The Google Assistant is a great example of this. In the home, we have added over 200 new device partners that work with Assistant just on the last 4 months alone. We now partner with all major manufacturers of connected devices for the home in the U.S. All told, the Google Assistant can now help…

[Operator Instructions]. And our first question comes from Douglas Anmuth of JPMorgan.

Ruth, just first on the accounting change, I was just hoping you could clarify. If we're trying to normalize that, is it right that we would be adding back about $632 million to operating income and then reducing EPS by $3.40, and then just on the EPS side, perhaps adjusting for the tax rate? And then just in terms of the business, I just wanted to ask about Waymo. If you could talk a little bit about just the latest timing for the commercial launch in Phoenix and how quickly you'd look to expand to other markets, and then just how you're thinking about the technology and whether you'll license it to others going forward or keep it more proprietary for Waymo services?

Sure. So on the accounting standard, we try to lay out all the component parts clearly on the cover of the earnings release so that you would have it all in one place. I think you summarized it right, but I'll just direct everybody to the earnings release. The net of which was the gain from the equity investments was $2.4 billion to net income. That is net of performance fees as well as the release of a deferred tax asset that we have, so it does reflect $3 billion in gains. And I think you know this, but this quarter, the accounting standard requires marks for everything where there is an observable raise. So these are unrealized -- the majority of them are unrealized, not actually monetized by Alphabet, and then the performance fees are calculated based on investment returns. They're accrued but not paid until an exit event occurs, and they do appear in OpEx. And as you noted, there is also, therefore, the benefit that flows through on the tax line, and that is 5 percentage points of benefit offset to the effective tax rate for the quarter. As it relates to your Waymo question, there was a lot in there. We do remain very excited about the opportunity with Waymo and our continued progress on multiple fronts. It is still very early. In terms of our progress, this year is about offering a service that is safe, that works, that delight users in the Phoenix area. The rider program in Phoenix is open to members of the public, and riders will use a Waymo app to hail one of our fully self-driving cars without a driver at the wheel, and will pay for the service. We've also had progress on the vehicle partnerships, as I mentioned in my opening comments. Last month, Waymo announced it signed a long-term strategic partnership with Jaguar beginning with a collaboration to design and manufacture self-driving I-PACE vehicles for Waymo's transportation service. These are all electric cars. This new partnership in the vehicles adds to our strong position with FCA, and the production of the cars begins in 2020. And then we are expanding our testing to more states. We're also working on additional areas like applying the technology to logistics and deliveries and working with cities to help strengthen public transportation and for personal use vehicles. And as we've talked about on a bunch of calls, the opportunity is here for us because we started with safety, and we remain a leader in safety, and we do believe that's the foundation for success, and it builds on the -- all the testing miles that we've done. So we keep coming back to when you create vehicles that drive themselves faithfully, we think there's a lot of potential uses and business opportunities, and that's what we're focused on.

And our next question comes from Heather Bellini of Goldman Sachs.

I wanted to ask two quick questions. One, just one on GDPR then one on cloud. On GDPR, just wondering if you could share with us kind of any impact you're thinking about as the implementation occurs later in May, and so any thoughts you could share there would be great. And then on cloud, Sundar, you had mentioned you're seeing a lot of momentum. You said G Suite, I believe, accelerated in Q1. I was wondering if there was any color on the GCP side that you could share from a growth perspective if that business accelerated or not and kind of how were the deal sites trending for that business in particular.

Great. Maybe I'll do the GDPR first. GDPR, I realize, is a fairly new public OPEC. But for us, it's not new. We started working on GDPR compliance over 18 months ago and have been very, very engaged on it. It's really important, and we care about getting it right. And overall, we have long had a very robust and strong privacy program at Google, too. So we are committed to meeting requirements on May 25 and also long term. We are working very closely with advertisers, publishers and our partners. And we will also update all the privacy policies and controls we provide to users worldwide. So it's a big effort. We are very committed to it. We are very focused on getting it right by our users and partners, and that's where our focus is now. On -- Heather, on cloud, I guess your question was about overall growth, and we are continuing -- the momentum has been very strong on cloud as well. We haven't talked about G Suite much, and so we highlighted it the moment I'm there, but cloud is continuing its great growth. We are seeing it across the board. Things worth I would call out is we are seeing larger deals as well. We are seeing good synergies between G Suite and cloud. Areas where we have done acquisitions like Apigee, they are beginning to work in terms of driving synergies to cloud. And the efforts we are beginning to put particular with our partners, that is beginning to bear fruit as well. So we have go-to-market programs now with SAP, Cisco and Salesforce. And I think we are beginning to see early results from that, and hopefully, that translates into more momentum going forward.

And our next question comes from Eric Sheridan of UBS.

Maybe two for Sundar, if I can. One, on mobile search, continue to call that out as a point of strength in the results. What are you most excited about in terms of either the product innovation or the ability to get consumers to adopt mobile search more broadly on devices globally, which could lead to more ad budgets moving it to mobile search? And then on hardware, you've now been through 2 years of sort of Pixel devices. You've made the aqui-hire of ETC engineers. Can you give us a sense of what you've learned so far from your hardware efforts and how that might evolve product innovation or go-to-market strategies long term?

On mobile search, for me, mobile obviously raises the bar. And if you look at the evolution of Search, we gave from -- we evolved to stay ahead of user expectations, and we evolved from just providing links to answers. I just feel at a high level the next big evolution we are doing as part of mobile search and assistant is to actually help users complete actions, to help get things done. And it's really hard to do at scale, and that's the work we are doing. And as we do that, it'll impact just -- not just the Assistant but mobile search more broadly. And obviously, that has a commercial impact as well. So we continue to be very excited about the opportunities there. On hardware, the exciting part for us is now, I think we have all the end-to-end capabilities of a world-class hardware organization, along with the quality of the software organizations we have always had. And in this area, it truly takes long-term planning. And so for example, if you think about silicon, et cetera, the longer you can do it, the more advantages you have. And so I definitely feel we are taking the steps towards being able to do this well for the long term. Part of that obviously involves scaling of our go-to-market strategies both in the U.S. and internationally so that we can drive adoption. I said earlier, our Net Promoter Scores show that we are right up there with the best-in-class devices and across all the products we have, not just our Pixel, across our Nest family and everything we do. So the opportunity is clearly there. We're going to lean into it, and it takes two to three years to really get to the scale where we want to see it and -- but we are committed to getting there.

And our next question comes from Mark Mahaney of RBC Capital Markets.

I want to follow up on Heather's question on GDPR, and the question I want to ask is, I understand that you're -- been working for a long time to make sure that you're compliant. But do you think that GDPR or other regulation that you see on the horizon is likely to impact materially the targeting capabilities about that advertisers have on Google? Is there something in the regulation that's going to make Google and its properties less attractive to advertisers? That's the action question I want to ask.

Thanks, Mark. Above everything else, as we are working through GDPR, we are making sure we are focused on getting the user experience right for our users and our partners. But to clarify your question further, first of all, it's important to understand that most of our ad business is Search, where we rely on very limited information, essentially what is in the keywords to show a relevant ad or product. And so we've been preparing this for 18 months, and I think we are focused on getting the compliance right. It'll be a year's long effort, and we are helping not just us but our publishers and partners. But overall, we think we'll be able to do all that with the positive impact for users and publishers and the advertisers and so our business.

And our next question comes from Brian Nowak of Morgan Stanley.

I have two. The first one on desktop search. So it's nice to hear that your oldest business is still growing. Just curious, could you give 1 or 2 tangible examples or products that are still driving the desktop search growth? And Sundar, I understand you're always focused on user experience. At a high level, what do you see is the biggest areas potential further improvement in desktop search? And let me ask you the same question about YouTube. What are sort of the biggest areas of tension that you're focused on improving from a user perspective on YouTube right now?

So on desktop search -- sorry, is your question on the user experience on desktop search, how do we see improvements? Look, I mean, the same. First of all, users are having cross-device experiences, cross-screen experiences, right? So I think your desktop search experience, mobile search, everything goes hand-in-hand. And every -- all the work we are doing to make mobile search better translates to desktop search as well. Areas where desktop search historically has been a bit behind is in terms of things like identity and payments and having all that work well to enhance the user experience. And with Chrome now, we are investing a lot in those areas as well, and I think that will contribute overall to improvements there. On YouTube, there are many, many areas we are focused on YouTube. They're always very focused on making sure they are supporting emerging formats, be it mobile live streaming or emerging formats like VR, and so that's an area of focus for us. We are also really looking at what are all-new monetization options for creators beyond advertising. So be it subscriptions, features like super chat, which we have launched, are very popular. We have beta testing sponsorships, merchandise, merchandising and concept, ticketing and et cetera, right? So these are all areas by which we are improving. And obviously, there are additional areas like Music and YouTube TV, which are seeing great momentum as well.

And our next question comes from Ross Sandler of Barclays.

Just two questions, please. Americas revenue accelerated nicely on a currency neutral basis. It's a geography that rarely comes up on your calls. So any color about what's driving that acceleration and the sustainability of what's going on in the Americas region? And then, Ruth, a question on sites TAC. So I know you said the pace of deleverage is going to start to improve next quarter. Is this something that we should expect to happen for a year and then kind of normalize back to pretty steady pace of deleverage? Or is this -- are we over some critical threshold, and we should see this trend of moderating deleverage continue for several years into the future?

So on your first question, other Americas. I would say, like the other regions, really pleased with the strength we have. Across the regions, it is obviously one of the smaller ones, so growing at a slightly faster clip and really pleased with the broad strength there. It starts with the sites revenue strength. But on top of that, they benefited from hardware devices launching in some additional markets over the past year. And then in terms of TAC, I would say there's not much to add to what we've already said after some -- a kind of sustained period of stronger increases. We were pleased last quarter to be able to signal that this quarter that pace of change is slowing, and just leave it at that for now.

And our next question comes from Anthony DiClemente of Evercore.

I have two, one for Ruth and one for Sundar. Ruth, on CapEx, even if we exclude the Chelsea Market one-timer, the gross in CapEx, is it really substantial even on a kind of recurring basis. Should we expect that sort of dramatic growth or step-up in the growth of rate in ongoing CapEx to continue throughout the year? Or other than the Chelsea Market one-timer, were there any -- do we have any reason to think that it was timing in terms of the timing, front-end weighted, it's the first quarter for CapEx? And then secondly on -- Sundar, just a question on YouTube and your media strategy at a higher level. In view of the success of other competitive subscription TV products out there, Internet video products, can you just talk about YouTube Red and any thoughts on ways you can accelerate growth for your YouTube subscription video products, whether that may be organic investment and content original production or even via acquisition?

So in terms of CapEx, it's about equally split between facilities and our technical infrastructure. And as you know that we have the $2.4 billion purchase in New York as well as discontinued ground-up development projects. Facilities does tend to be lumpier over time. We are continuing with the ground-up development projects. And as a reminder, we do favor owning rather than leasing real estate when we see good opportunities, and that has served us well over the years. But I think more to your question with respect to technical infrastructure, that reflects investments in compute power to support growth that we see across Google, and the largest component is on machines. It's also on data centers and undersea cables. And on machines, the biggest contributor is the demand that we're seeing. So in particular, it's the expanding application of the machine learning efforts across Alphabet, plus the requirements for cloud and Search and YouTube, and then secondarily, the increased cost of newer technologies, CPUs, memory, network. So I think, really, to answer your question most directly, it reflects the demand that we're seeing, so I wouldn't want to suggest a one-off in terms of the investments we're making in technical infrastructure. And then in terms of the data centers, we are investing globally. We currently have over 20 sites on 4 continents, and that's under different stages of construction, as Sundar noted. And it's across the U.S. Tennessee, Alabama, South Carolina, Iowa. So we're really building out to support the growth that we're seeing.

Sorry, on the second question on YouTube, for sure, the adoption and feedback across both YouTube Red and YouTube Music has been great to see. We are doing a lot more work there. You will see us continue to invest further and develop those offerings better, and as part of that, further drive adoption. So for example, YouTube Originals end up playing a big part in YouTube Red subscriptions. And so far, we have launched in a handful of markets, and we'll continue to roll it out to more markets there. And on YouTube Music, we are working on enhancing the product, and I think this definitely create opportunities there as well.

And our next question comes from Dan Salmon of BMO Capital Markets.

Sundar, I had two for you. First, during the quarter, where there were some reports of changes in leadership that your Search and AI divisions functionally sounds like separating leadership over those 2 very large, important businesses for the company. Could you talk a little bit more about that and how that may impact broader strategy for the company? And then second, a little bit more technical one on your advertising business you launched, shopping actions during the quarter with a pay-per-sale model, pricing model. And I was just curious to hear what type of feedback you were getting from advertisers that led to a product with that pricing model in particular, any other features of shopping actions that you think are important to highlight.

Thanks, Dan. Search has been leading the company in terms of how they have been adopting machine learning and AI, and it's really working well through Search and Assistant. We sense that, obviously, as an AI-first company, AI cuts across everything we do in Google. And so as an organization, it's a horizontal organization, which needs to serve all our areas and in some ways, the change reflects that. And we have very capable leaders. Jeff, who runs -- was the Founder of Google Brain and really well positioned to lead our AI efforts. And Ben has been at Google since the early days of Search, started in Google in 2000 and has been driving Search for over 18 years. And so we are very excited, and we think the changes will serve the company well. On your second thing, the question was on shopping actions?

And in particular, the price per sale pricing model.

So I think we announced the -- this new service in March, and the feedback has been very positive. I mentioned earlier, which is for retailers, when they are testing this, they see it drives an increase in basket size. So that means users are interacting with the product well, and that's all I have to share for now. It's still early days.

And our next question comes from Colin Sebastian of Robert Baird.

A couple for me, please. First, on the cloud business. I was wondering if you could provide any color, at least in the relative momentum you're seeing in that segment from infrastructure services compared to platform or software services. And then related to the adoption of AMP. I guess, a key question we get asked is whether that ultimately changes usage, and maybe you have some perspective on this from Android. But in the ecosystem between mobile web pages and app usage, if you're seeing any shift among users between those formats.

On the first question of cloud, look, I mean, I think the main thing I would say is the fundamental drivers of adoption of Google Cloud based on what we hear back from customers is our advantage in data analytics and machine learning. The fact that we really support open, agile development environment. Kubernetes has literally become the standard for workloads and the fact that we are open in terms of how we approach this space. Security is becoming a big differentiator for us and something we've been leading for a while, and I think that's driving it. G Suite, as I called out earlier, is a good synergistic driver. G Suite is doing well, and clearly, a very unique offering, and it's gotten very comprehensive. And so I think overall, it comes together well. On your second question around AMP, AMP has been definitely very successful. It's really made publisher content much more friendly for users in terms of latency and the user experience, and hence, that option has been great. For sure, AMP has definitely helped the mobile web, and that's part of the big reasons we did it. Mobile web is still a big part of how users consume content, especially around news, and so us investing there clearly makes a difference. I guess, for example, when we look at, I don't know, J.Crew adopted AMP, their mobile page loading times are now over 90% faster. And now they are integrating the Google payment request API. That reduces checkout times from 2 minutes to 30 seconds or so. So things like that. We are going to constantly stay on improving the mobile web, and that plays a big part in how our ecosystem works.

And our next question comes from Michael Nathanson of MoffettNathanson.

I have two, one for Sundar, one for Ruth. First, Sundar, can you give us any sense of how Google Home consumers are using Search in these devices differently than maybe the traditional ways of Search? And you're finding in those homes, is it additive to overall search activity? And then for Ruth, if you look at the last page of press release, where you've shown the new monetization metrics, you see a real increase in the cost per impression on network sites. So can you talk about maybe what's happening there? Is there a mix shift types of publishers, types of products? Or is that just market inflation?

Look, for sure, Google Home gives rise to a lot of new and unique use cases, actions that are a big part of it. Call mom is a good example of something you say to Google Home a lot. I can -- which is different than what you would say to Search. We see this as a good complementary thing. You will see Search embrace some of the capabilities you find in Google Assistant and Google Home and vice versa. And so overall, I view this as additive in the long term, and we are definitely just getting started there.

And then on the network monetization trends. First, just to give people a bit more color. When we launched the AdSense businesses, our network revenues were largely click-based. And over time, there's been a meaningful mix change in our business given the strong growth in programmatic, which is impression-based. So as a result, the shift now covers more of the business. And then in terms of the question on impression growth versus CPM growth, as we've discussed on prior calls, the network business is actually a number of different businesses. And then within that, we have flat year-on-year growth in the number of impressions that was driven by efforts to improve user experience through a reduction of less relevant ads and AFC. And so these changes had a positive impact on the year-on-year growth in CPMs. And then the trend and impressions in CPMs can clearly be volatile from quarter-to-quarter as we're optimizing for the user publisher and advertiser, but it really goes to the efforts that we make.

And our next question comes from Brent Thill of Jefferies.

Just as a question regarding any changes on your framework for growth versus operating margins. The last few quarters, you've seen steady top line acceleration, yet the margins were down. Can you just talk about how you think about it at a high level for this year? Any changes from the past?

Yes, it's an important question. As we've talked about on many, many calls, we have been and remain focused on supporting long-term revenue and profit growth, and we think the opportunity set ahead of us is quite extraordinary. And as I said in opening comments, just given our confidence and as we're looking forward, we want to make sure we're investing appropriately in the next phase of innovation, and we have clarity about some very compelling opportunities. And then our judgment, that enables us to maximize shareholder value. So we're taking the steps really to put in place the support for long-term -- longer-term growth. Part of what I'm saying, you can see in our sites revenue growth, try to make that clear in opening comments, we see this consistent, strong momentum globally, and we're really excited about the still sizable opportunity led by mobile search. And so we're continuing to invest to enhance the user and advertiser experience, and thereby, extend the growth in our ads business. You can see this also in the trend on the CapEx spend. As I noted in our opening comments, the investments we're making there really provide the compute capacity to support our growth outlook, and that's supporting the opportunities that come out of machine learning and the Assistant. And then we also see extraordinary upside in the newer markets, as Sundar has talked about, most notably cloud computing and hardware. And so we're investing to support the long-term growth opportunity there. And then finally, when we look at the market opportunity in both self-driving cars and life sciences, our judgment is it makes sense to place the kinds of investments that we are. And with all of this, what also hasn't changed is we appreciate the importance of prioritization and picking our spots, and we're keenly focused on steps we can take to both make the right investments with the proper intensity while being diligent about long-term plans and returns. So at a high level, the approach hasn't changed. You're seeing the investments here.

And our final question comes from the line of Stephen Ju of Crédit Suisse.

So Sundar, I think one of the themes that you as a management team has talked about has been to, I guess, democratize advertising with AI to help SMBs who may have found advertising across Google's ad products to be perhaps overwhelming. So can you talk about the rate of uptake among the smaller advertisers and whether or not this is helping to catalyze growth in new budgets and where these guys might otherwise have not been able to advertise before? There's SMBs and then there's local also. So what will be the plan to get this technology into the hands of folks who will want to use them?

Look, I mean, there's a big focus for us. And today, SMBs are -- play a big role in our ecosystem, and we are doing a lot of stuff to support them across the board, right, and from things like in our offerings to help SMBs get an online presence, create a website, be discovered in local, search and Google Maps. So we do a lot of detailed work to make sure SMBs are working well. We are also doing a lot of stuff on local as well, including efforts that are even around local services. So we have very specific initiatives. This is going to be -- I mean, it's actually -- to us, it's bread and butter of what we do here, and so there's a lot of effort underway, not to mention the fact that we provide G Suite for businesses as they scale up as well. So it's an end-to-end offering, and we'll -- you'll continue to see us invest more here.

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 second quarter call.

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