Good day, ladies and gentlemen. And welcome to the Alphabet, Inc. First Quarter 2016 Earnings Conference 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 will now like to turn the conference over to Ms. Ellen West, head of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Alphabet's first quarter 2016 earnings conference call. With us today are Ruth Porat and Sundar Pichai. 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 2015 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 turn the call over to Ruth.

Thanks. Our very strong revenue of $20.3 billion in Q1 underscored the great momentum of our businesses globally, with consolidated revenue growth again accelerating meaningfully, up 23% in constant currency versus last year. The primary driver was the increased use of Mobile Search by consumers, benefiting from our ongoing efforts to enhance the Mobile Search experience. We also benefited from solid growth in desktop and tablet search as well as continued strength in YouTube and programmatic advertising. We continue to rationalize our portfolio of products to ensure we efficiently and effectively focus our resources behind our biggest bets across Alphabet. I will present to you in the following order: first, review the quarter on a consolidated basis for Alphabet; second, review the results for each of Google and Other Bets; finally, I will conclude with our outlook. Sundar will then review our business and product highlights for the quarter, after which we will take your questions. Beginning with a summary of Alphabet's consolidated financial performance, total revenue was $20.3 billion, up 17% year-over-year and down 5% sequentially. As a result of the ongoing strength of the U.S. dollar, we realized a negative currency impact on our revenues year-over-year of $762 million or $593 million after the benefit of our hedging program. Holding currency constant to prior periods, our total revenue grew 23% year-over-year and declined 4% sequentially, reflecting holiday seasonality. Once again, Alphabet revenues by geography highlight both the strength of our business around the globe as well as the impact that currency headwinds continue to have on our non-U.S. business. U.S. revenue was up 21% year-over-year to $9.4 billion and down 9% versus Q4. UK revenue was up 15% year-over-year to $1.9 billion and flat sequentially. In fixed FX terms, the UK grew 21% year-over-year and 5% quarter-over-quarter. Rest…

Thanks, Ruth. It's great to join you all today. Our teams are off to a great start this year and there is even more excitement in the month ahead as we gear up for big events, like: our annual developer conference, Google I/O; our YouTube event, Brandcast; and the Google Performance Summit for advertisers. Google's mission is to organize the world's information and make it universally accessible and useful. And after 17 years, we have just scratched the surface of what's possible. We are reinvigorated around this mission and, as you will hear, we are making solid progress across many of our products. Today, I'll quickly share a few highlights from the quarter, as well as some of the areas where we are investing to make our products more useful and intelligent. Then, I'll give an update on our Advertising business and our growing Cloud business. A few highlights from the quarter; we continued to invest in making Search more useful and assistive. In the early days, when you did a search on your desktop, we gave you 10 blue links then sent you on your way. Users still had to do too much work to find the information they were looking for. We have made a lot of improvements over the years to add more comprehensive and assistive information right within the search results. For instance, 10 years ago, if you tried to find the score during your favorite soccer team's match, we'd likely point you to some news articles or the team's website. Today, we show the live scores for nearly 200 soccer leagues across 70 countries, so fans around the world can quickly find information, like upcoming schedules, team news and conference standings right in the search results. We are incredibly well-positioned to better assist our users,…

We'll now turn it back to the operator for questions. Thank you.

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

Thanks for taking the questions, maybe just two, one on YouTube; you've now played around with the idea of original content, also injected a subscription offering into the marketplace. What have you learned from the early days of original content and a subscription offering and how that might allow YouTube to evolve and change over time as a product offering? And second, with respect to the Advertising business, I was curious if there were any verticals or geographies that you might call out as either strengths or weaknesses in the Advertising business during Q1. Thank you.

Thanks, Eric. On YouTube, we are definitely excited by the successful roll-out of YouTube Red. It's been very well received. We've really focused on our creators and partners, so hopefully you've caught some of our YouTube Originals. We have released six so far, which are available to YouTube Red members. So early indications are that this is something that's going to resonate well with users, and we are working on a lot more original content throughout the year. And we'll see how it goes.

And then in terms of your question on the regions, as I tried to make clear in my opening comments, what we saw was real strength across the board. I think you could see that from the growth rates, with U.S. up 21% year-over-year, and that was really strength across products. UK, we're really pleased with the team. We continue to see great execution there. On a fixed FX basis, as I noted, up 21%. The biggest contributor to growth in the UK was Mobile Search. And then rest of world growing at 25% on a fixed basis. That's about in line with last quarter. We continue to be really pleased with the growth we're seeing there. In addition to the ongoing contribution from Mobile, the rest of world also benefited from Play and then really nothing to note with respect to verticals.

Thank you.

Thank you.

Thank you. And our next question comes from Carlos Kirjner of Bernstein. Your line is now open.

Hi. I have two quick questions, first on margins. Despite the increasing TAC as a percentage of revenues, adjusted operating income margins expanded now almost 130 bps and 140 bps for Google year-on-year. Can you help us understand, even if roughly, how much of this margin expansion is specific to the quarter, like due to FX, versus systemic or secular, so to speak? And the second question, I think maybe for Sundar, can you talk a bit about the decision you took last year to have an additional ad on Mobile Search response pages relegating organic results below the fold? How is it good for the user experience to have ad instead of organic? And if it is good, what does it say about the potential for innovation in organic search? Thank you.

Thanks, Carlos. So starting on the margin question, you've hit a couple of the components, so I'm going to try and just break it down into the drivers on cost of sales versus OpEx more broadly, as you asked it. So on the cost of sales or the gross margin trend, as I tried to make clear, certain costs associated with revenue are going up, given secular trends in the market, so in Sites, Mobile carries higher TAC than does desktop and Mobile remains a strong growth driver, so we do expect this to continue. And then on the network side, we have strong growth in programmatic and that carries higher TAC than traditional ad buying. The obvious result is more revenue and gross margin dollars, but at a lower margin. And then on OpEx more broadly, we remain very committed to long-term revenue growth and profit. As we've talked about on prior calls, we did set priorities in the 2016 budget and we made some tough choices because our aim is to be as efficient and effective as possible with investment dollars, while properly funding the big opportunities that we have that are reflected in OpEx. So as I've repeatedly said, some of the biggest bets are in Google. Sundar commented quite a bit on cloud. That's an exciting opportunity. We want to continue to add head count to drive growth. And all of this is consistent with our goals of driving long-term growth in revenue and profit. So it goes to my opening comments that we're focused on controlling the expenses we have, and then there are certain trends, as I noted, in particular on the TAC side, that have been increasing with the strong growth we're seeing in mobile and programmatic.

And, Carlos, on the ad side, we are incredibly sensitive to the user experience on Search. And so we are constantly evolving how we display ads, but we take a very long-term view. Our ads quality efforts, these are people who have been working on this for many, many years and they are squarely focused on optimizing for positive metrics across users and advertisers. So our utmost focus is making sure, for users, these changes have a positive impact. And mobile is an entirely different paradigm and so a lot of things are counter-intuitive. So, for example, users are very comfortable swiping on mobile. So we deeply think about these things, and I'm very comfortable about how we are planning this for the very long-term.

Thank you.

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

Thank you. Ruth, I just had one question, a follow-up from a previous one on the regions. So the U.S. had greater than expected seasonal downtick. It was down 9% quarter-on-quarter. And I know that you picked up Yahoo and lost AOL from 4Q to 1Q. So is that the primary driver of that or as YouTube becomes a bigger percent of your revenue, should we expect greater seasonal uptick in 4Q and seasonal downtick in 1Q? Can you just give us a little bit more color on what's driving that? Thanks.

Well, we, as you know, don't comment on any particular partner. So all I can add here is that the deceleration quarter-on-quarter does reflect holiday-related seasonality, which we did call out last quarter, and you see that in a number of the products.

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

Thanks. You talked about TAC rising because of the increasing mix shift towards mobile and programmatic. There seems like there was a little bit of an extra bump up this quarter. Would there have been any one major renewal of a deal that would have caused that? It did seem to spike more than what you would get, I assume, if you just rolled out mobile and programmatic. And then any commentary at all on Nest; there seemed to be an unusual amount of press since intra-quarter on troubles with that asset? Could you just comment on qualitatively how the asset is doing? Thank you.

So on TAC, it's really the ongoing growth in Mobile, as I've kind of answered a couple of times here, and that reflects the strong secular trends behind mobile, so really nothing to add on on the Sites TAC side. And then on the network side, again, it's really the higher TAC that we're seeing on programmatic, so nothing really to call out. And then with respect to your question on Nest, I guess what I'll add there is Nest products are best-sellers in the category. It's a leading brand in the connected home. It's obviously early, but a very exciting category. And as we've talked about, our Other Bets are all very early stage, but continues to be best-seller in the category.

Okay. Thank you.

Thank you.

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

Great. Thank you. This question is for Sundar. It's multi-part, but I was wondering if you could talk a little bit more about your cloud ambitions? And wondering what do you see as the biggest changes in strategy post Diane Greene's appointment? And then, how are you getting enterprise customers to think of you as having enterprise DNA, if you will, which is something that took Amazon a long time to get. And I guess lastly, just if you could just help us think about which type of workloads do you see Google as being the most competitive for at this time? Thank you.

Thanks, Heather. Obviously, I talked about it a lot in my prepared remarks. And we have already had a lot of momentum in this area. And in many ways, given the scale at which we have done this internally for us, we view it as an area we are very competent at. What Diane has brought to us to is a deep understanding of how to think about what enterprises need and adapt to it in a very detailed and nuanced way. And you saw the momentum at the Next Conference, which she hosted. We are getting a lot more inbound. We are in much deeper conversations than we have ever been before. We do think we are competent across a range of work flows. And areas where we view we will be uniquely capable over time is, because of our machine learning capabilities, helping enterprises really understand their data, understand how best they can do what their core competency is and really revolutionize around that. It's early days and it's a long-term investment. But bringing our machine learning APIs over time through cloud to our enterprise customers is going be a huge source of differentiation for us.

Thank you.

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

Thanks for taking the question. Two things; first, Sundar, I was hoping you could comment more on Mobile Search pricing, in particular it gets a little bit lost just within overall pricing per-click, especially with YouTube in there. So I was hoping you could comment on pricing on more of a like-for-like basis. And as inventory perhaps stabilizes some, would you expect pricing here to increase over time as conversion improves? And then secondly, Ruth, if you could just comment a little bit more on other income and just help us understand some of the details there on the negative number in that line? Thanks.

So I'll take those. In terms of the first question, there's obviously some data, as I referenced, attached with the press release. And, as you know well, all of the monetization data reflects a host of factors, from geographic mix and device mix and property mix, as well as it's all on a floating FX basis. And clearly, FX is a contributor. I think you're trying to get more color on Mobile. And what's hopefully clear from the opening comments, is that Mobile continues to outperform. Desktop growth did pick up modestly in Q1, but, from opening comments, should be clear that Mobile Search revenue was up significantly. And then in terms of your question on other income, let me point you to the OI&E table that's at the end of our press release. This line consists of a number of different items. They can be affected by different trends, but you can see the breakout in that table, which hopefully is helpful there. Interest income has been fairly consistent. We do continue to manage our portfolio conservatively. FX is consistently an expense here. It was slightly elevated again this quarter, given the ongoing volatility in foreign exchange markets. We haven't changed our approach to hedging, but up with volatility in the markets. And then the OI&E line also includes changes in value where equity pickups related to marketable and nonmarketable securities and investments. We appreciate with all those different line items it's tough to forecast, but you can see the detail attached to the press release.

Thank you.

Thank you. And our next question comes from Steven Ju of Credit Suisse. Your line is now open. Steve D. Ju - Credit Suisse Securities (USA) LLC (Broker) Thank you. So, Sundar, I think it was at I/O last year when you started to call out the products which have over 1 billion users. At this point, are you able to elaborate on what percent of these users have either a Google ID or are known users for you? And, Ruth, kind of a housekeeping, I guess, item on the CapEx here. When you talk about CapEx with the Other Bets being primarily for Fiber, is this a fairly sort of straightforward passing of homes, or is your cash use going toward developing new technologies or products like SkyBender? Thanks.

Steven, on the first question, maybe I can add more color this way. So user base is scaling most, you know, we are also seeing tremendous shift towards Mobile. It's in many of these products. We are already over 50% of these users are coming from Mobile. And in Mobile typically, all users are signed in. And so I think over time as the shift continues, I think we have a user base which is signed in. And so that's the way we think about it.

And then on the CapEx question, if I just broaden that a bit, the CapEx trends in part is efficiency, in part is timing when you look at year-over-year spend. Compared to last year, we had some outsized machine spend that filled some recently constructed data centers. And as we've consistently said, our technical infrastructure is a really key strategic asset for us. We have tremendous scale. We continue to add to it, and the team has done an extraordinary job innovating to deliver some meaningful efficiencies in machine use. And that enables us to benefit from earlier investments. And although you asked about the Fiber side, just to build off of what Sundar was saying on cloud, given what a strategic priority that is for us, and the requirements for a leading cloud business are clearly at the core of all that we do and at a scale that's unmatched, given our sustained investments in infrastructure. One of the things that was also mentioned at Next is that we plan to add 12 new regions. And to be clear, we're going to be using multiple execution paths for those data center requirements. In other words, every cloud region isn't necessarily going to be housed in a Google data center. So we don't need to build data centers in all of these places. They will all incorporate the same Google hardware and software and meet the same performance, reliability and security requirements. And investing in cloud isn't only about CapEx. We also put a lot of head count behind that again this quarter. And then more specifically on the Fiber side, as you were pointing to, we do expect that to increase throughout the year as we execute on the cities that we've already announced. It's primarily about continuing to execute on those cities. We now are up to 22 announced cities, two most recent announcements being some buildings. We're bringing fiber to like buildings in San Francisco and we're working with the City of Huntsville. That being said, I liked your question because we're also very focused on innovation and technology. And so it's really both, but predominantly continued execution against these cities that we've announced. Steve D. Ju - Credit Suisse Securities (USA) LLC (Broker) Thank you.

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

Hey. Good afternoon, everyone. Just a few questions on YouTube; first, on the Preferred program, Ruth, you mentioned it sounds like the growth continues to be really strong there going into Brandcast. And I was just curious, is the program now formally rolled out globally? And then I've got one follow-up on Red.

So in terms of Preferred, you're right. I did note that the strong revenue growth there is driven virtually exclusively by video. That's TrueView and increasingly Google Preferred, and, as we said, nice ad (45:29) promotion there as well.

And it's largely rolled out in major markets and we'll continue to do that.

Okay, great. And then just a quick one on Red, it seems as if the direction for the content remains to focus on your own originals right now. What may or may not make you consider looking at other licensed, maybe more traditional, TV or film content?

Well, I mean, look, we are going to approach it comprehensively. And we have obviously had great early traction with the six original series we have released so far. This year, we are on track to release 15 to 20 original series or films coming up. (46:11) And so I think that's an exciting direction we will pursue, but, at the same time, we'll keep an open mind about all other revenues as well.

Okay, great. Thank you.

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

Great. Thank you. I have a few. First, for Sundar, could you talk about the cloud, why really get more aggressive now? We've been riding on it for many years, and just wondering why now really ramping up the investment? And how would you characterize the margins or the returns on capital in that business? Why is that interesting for you? And then maybe for Ruth, you know, you give us a lot of detail on click growth, but I'm just wondering if you can help us all on query growth, just how that's trended since Mobile really took off? Is it growing? How is it trending? And do you have more room to monetize, given where your ad coverage is now? Thank you.

Just on the first one, I would say there are three points of inflection for us, and that's why we are really ramping it up. The first is we've always been doing cloud. It's just that we were consuming it all internally at Google, but as we have grown, really matured in terms of how we handle our data center investments and how we can do this at scale, we have definitely crossed over to the other side where we can thoughtfully serve external customers. So that's the first point of inflection. The second point of inflection for us is as we've been investing in machine learning and AI for years, but I think we are at an exceptionally interesting tipping point where these technologies are really taking off. And that is very, very applicable to businesses as well, and so thoughtfully doing that externally, we view as a big differentiator we have over others. And third, is definitely Diane Greene coming in. And I think I wanted to (48:12) scale our efforts here thoughtfully when it is set up with a great leader who understands this space deeply. And so those are the three main reasons why we are significantly ramping up what we are doing there.

And then on query growth, we don't really talk about query growth. As Sundar said, focused on answers; there are a lot of new ways to search on mobile, of course, voice, et cetera. So let me try and actually add a little more on your question on cloud. We've consistently said it's early days. You asked about ROIC. We're really excited about the magnitude of the opportunity, as Sundar has talked about. And one thing that's really powerful here is we're benefiting from our heritage, from our differentiated strength, the scale of our infrastructure. Those are investments we've made over many years that give us extraordinary efficiency. We have robust security. Again, we've invested over many years. We have unparalleled machine learning. And so really, when we think through to the ROIC opportunity compelling building on investments that we've made and continue to make and a very exciting opportunity.

Thank you.

Thank you. And your next question comes from Anthony DiClemente of Nomura. Your line is now open.

Thanks for taking my questions. I have two. First, for Sundar on Google Fiber, just at a higher level, would you please broadly update us on your learnings from Google Fiber up until this point? And what are the goals that Google is trying to achieve with Google Fiber in terms of longer-term ambitions in terms of TV or video distribution? And then, Ruth, you mentioned in your prepared remarks, Mobile Search being driven by improvements in ad formats and delivery starting in the third quarter of last year. Is there any way to frame or think about what Sites revenue growth might be on a recurring basis if you try to exclude the impacts or benefits from the changes in formats that you mentioned and as we start to think about the year-over-year growth comparisons there for the back half of 2016? Thank you.

So let me go ahead and start on the Fiber question. Fiber is one of the businesses that is in Other Bets. And like all of our access efforts, we're really focused. And our vision here is to create abundant and ubiquitous networks. We think there's a lot of opportunity to improve the experience that users have, and that's where the Fiber team is focused. And we have some other efforts within Other Bets that are really exciting as well that address access. Loon within our X business is targeting the 4 billion people still offline. And we view that similarly as a big opportunity and an important problem to address. And in terms of the early learnings, there have been a lot. As I talked about on the last quarter call, we've really continued to refine and enhance our go-to-market strategy, the way we're working with cities, the way we're building out those cities and really the level of technology and innovation that we can use to differentiate the offering and are pleased with the ongoing efforts there. And then in terms of the change in ad format, as we've talked about on a lot of calls, innovation is core to all we do. It obviously happens on its own timeline. We have a culture of it. We're continuously focused on it. I'm not going to break out impact for any change. We're constantly looking to innovate and improve the user experience. And so there was a step-up, which we've talked about, and we continue to look at other ways, as Sundar talked about, to continue to enhance the user experience. But I think the most important point and somewhat implicit in your question, that shouldn't take away from the very strong underlying revenue and revenue growth that we have in that business.

Thank you, Ruth.

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

Thanks for taking my questions. I have two. Just on Mobile Search and the mobile ad format changes in 3Q of last year, could you just help us? Were those changes made globally last year in the third quarter? And if not, how should we think about when they will go globally or how you're kind of phasing those changes? And then, the second one on the desktop, Ruth, you mentioned that desktop growth picked up in the first quarter. What drove that pickup in growth and any learnings from the change in the right-hand rail in the first quarter? Thanks.

The launch which you're talking about was global. So we've been doing these changes for a long time and so we try to roll it out globally, and that's what we did.

And then, in terms of the desktop format change, so we had a modest benefit from that change where, just to be clear for all, we reduced the ad load by removing ads on the right-side of the screen while adding a fourth ad slot for highly commercial queries in the aggregate. That resulted in a cleaner, more useful, presentation and improved user experience. It was a modest impact, but additive.

Thanks.

Thank you. And our next question comes from Ben Schachter of Macquarie. Your line is now open. Ben Schachter - Macquarie Capital (USA), Inc. Hi, guys, a few questions. Sundar, your commentary on Play focused on games, but what needs to happen to have more verticals beyond games become meaningful? And then, Ruth, a couple more on the Sites TAC, at a high level, how do average TAC rates differ on mobile versus desktop? And aside from the TAC rates, are there any other notable contractual issues that differ meaningfully between mobile and desktop search partnerships? Thanks.

Yeah, Ben, on the first question, I think that's a good question. We are seeing traction across categories. It's just that games are at a much larger scale, but, for example, when we get into education, we see if you view that as a vertical, we do see traction there and so on. So I think taking a very long-term view, it will probably reflect they're all, there are commercial opportunities across every vertical. But game developers are the savviest developed person in terms of getting ahead of this curve.

And on your TAC question, as I've indicated a number of times already on the call, the TAC rate is higher on Mobile. Mobile's growing at a faster rate and what you're seeing here is a mix shift. So there is a delta between the two. But I think, importantly, we are benefiting from an important secular trend behind Mobile, and like the revenue dollars and the gross profit dollars that come as a result of that, and we'll continue to innovate on mobile and are excited about the opportunity, in particular with all the changes that we continue to see in the way users use the phone and the opportunities.

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

Okay, great. Thanks very much. Sundar, first off, you mentioned a lot of the ongoing projects at Google, but I wonder if you could share with us maybe the two or three areas that you're spending the most of your time on or are focused on? And related to that, one of the strengths of the company is obviously the strong engineering orientation and ability to hire some of the best talent and acquire the best technology. And the company has been able to adapt very quickly to change, but I wonder which areas of your business demonstrate where Google or Alphabet are really on the forefront of development, pushing innovation rather than adapting to changes you see in the market. Thank you.

Thanks, Colin. On the first thing, obviously, we are doing many things, but I tend to spend my time on the core of, you know, our core product. I think we have a unique opportunity to evolve search to be very assistive in how we serve our users and be an intelligent assistant that helps users throughout their needs in context, especially in the context of mobile. That's an area definitely I spend a lot of time on. And related to that, we do think we can do a lot of that by based on our core advancements in machine learning and AI. So that's an area we invest a lot. And I'm thoughtfully involved with that as well. And third, definitely from a computing standpoint, computing is foundational to everything we do. And so thinking through about how computing evolves, be it emerging technologies like VR or how mobile advances over the next few years, so these are all areas where I do spend time on. And overall, I do think in the long run, I think we will evolve in computing from a mobile first to an AI first world. And I do think we are at the forefront of development. So we don't view it as adapting to it as much as pushing hard and getting there. And so that's the core of what we do, and we'll continue to do that.

Thank you.

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

Thanks to everyone for joining us today. We look forward to speaking with you again on our second quarter 2016 call.

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