Good day, ladies and gentlemen, and welcome to the Alphabet Q3 2016 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. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Ellen West (0:33), Head of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Alphabet's third quarter 2016 earnings conference call. With us today are Ruth Porat and Sundar Pichai. While you've been waiting for the call to start, you've been listening to Dua Lipa, a rising new pop star from London, whose most recent single on YouTube has found fans all over the world and cracked the top 40 in the U.S. ahead of her debut album release early next year. 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 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.

Thank you, Ellen (2:06). Our revenue of $22.5 billion in the third quarter underscores the terrific performance of our businesses globally. For the quarter, our consolidated revenue grew 23% in constant currency versus last year, notwithstanding a challenging year-on-year comparison. Once again, the primary driver was Mobile Search, with ongoing strength in YouTube and important contributions from programmatic advertising and Play. I'm going to 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 $22.5 billion, up 20% year over year and up 4% sequentially. We realized a negative currency impact on our revenues year over year of $196 million or $91 million after the benefit of our hedging program. Holding currency constant to prior periods, our total revenue grew 23% year over year and increased 5% sequentially. Alphabet revenues by geography highlight the strength of our business around the globe. U.S. revenue was up 22% year over year to $10.6 billion. UK revenue was up 5% year over year to $1.9 billion, reflecting the meaningful impact of the decline in the British pound relative to last year. In fixed FX terms, the UK grew 18% year over year. Rest-of-world revenue was up 22% versus last year to $9.9 billion. In fixed FX terms, revenues were up 25% year over year. GAAP other cost of revenues was $4.5 billion, up 30% year over year. Non-GAAP other cost of revenues was $4.2 billion, up 29% year over year, primarily driven by Google-related expenses, specifically costs…

Thanks, Ruth. I don't think I can remember a busier time in Google's history than the past few months. We introduced the world to the Google Assistant, powered by our state-of-the-art machine learning technology. We unveiled a beautiful lineup of new hardware devices, including Google Home and the Pixel phone, which is getting great reviews. We launched a new messaging app, Allo, and a new video chat app, Duo. It's been an incredible quarter. Through it all, we are laser-focused on the priorities I outlined earlier this year, and in the next few minutes I'll quickly go through our progress this past quarter. We feel well positioned as we transition to a new era of computing. This new era is one in which people will experience computing more naturally and seamlessly in the context of their lives, powered by intelligent assistants and the cloud. This transition is as significant as the move over the last decade from desktops to mobile devices. As we've rolled out products like the Google Assistant, Pixel, Google Home, and Allo, we have gotten a glimpse of that future. And with our growing cloud business, we are helping our enterprise customers take advantage of this new era of computing as well. Today I want to walk through our progress across Google's key focus areas and the success of our growing advertising business. First, making knowledge and information accessible to everyone, we have long aimed to help people find the information that they want right when they need it and sometimes even before they think to ask for it. We reached an important milestone in that journey this quarter with the launch of the Google Assistant, which allows you to type or talk with Google in a natural conversational way to help you get things done regardless…

Thank you, Sundar. We will now take your questions.

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

Thank you so much for taking the question. Sundar, maybe for you, on the enterprise, thanks for laying out all the vision for the medium to long term on the enterprise and cloud. I think one of the big questions we get from investors all the time are where are the key areas you need to invest going forward in both capabilities, go-to-market, and how those might evolve over the next couple years. And then maybe a second question for Ruth, which is more a housekeeping matter, Ruth, with highlighting the increased marketing expense behind the product launches this year, were you referencing quarter-over-quarter or comparing year-over-year when you also launched products a year ago? Thanks so much.

On cloud, let me talk about a few areas. We have stepped up our partnering considerably so that we can offer our customers everything they want, and we have more vehicles for going to market. So scaling up through partnerships is a big area of focus and investment for us. We are also establishing a large cloud machine learning group so that we can take advantages of working with our cloud customers and make machine learning more accessible to all of them. I would say other areas are hiring across sales, engineering, and marketing. And as we head into 2017, I expect cloud to be one of our largest areas of investment and head count growth.

And then on your second question, there were really two parts to the statement. One, the obvious, is that sales and marketing is seasonally higher whenever we go into the holiday season. And so year on year, I wanted just to accentuate the point that we expect this trend to be pronounced this year because we're expanding. We're launching an even more expanded suite of hardware products. So it's really emphasizing the fact that the fourth quarter is higher and even more so this year with the expanded suite.

Thank you.

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

Thank you. I also wanted to ask a follow-up on the cloud. I guess I was wondering, Sundar, if you could share with us. What milestones should we be watching for in this business? And then also, if you had to characterize – you mentioned a couple different ones, but I'm wondering. What type of workloads are you having the most success with in GCP, and what's on your customers' wish list? What's the top one or two things that your enterprise customers for cloud might be asking for? Thanks.

Thanks, Heather. In general, the way we see it is that customers don't want to be locked in and they want to make sure their workloads can work in and be managed by containers that run on any platform. So our virtual machines and containers, including excellent open-sourced container management Kubernetes, which was developed by Google, offers that solution. So Kubernetes manages the provisioning, reliability, and auto-scaling of workloads. So we want to pursue a hybrid strategy, including on-prem and in all public clouds. So from a customer standpoint, they will want to use an open source workload management product, and Kubernetes can work with multiple customers. So that's broadly how we think about it.

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

Thanks, guys, two questions. Sundar, first on the Alphabet structure high level, so there's been some incredible innovation that's come out of Alphabet and the various businesses. If we look at something like Otto, which was acquired by Uber, or Niantic, which was the old Google Maps team, those were teams that were inside of Google that left Alphabet to start a new company and could have been potentially wholly-owned businesses of Google in a parallel universe. So do you think this structure is ideal for entire companies, or is it just new products and new technologies that you see as the vision here for Alphabet long term? And then, Ruth, the second question is just on – core operating margins for Google have declined a little bit versus the prior quarter trend of increasing. Can you give us some color on how much of that was due to mix towards cloud and other things that might carry lower margin versus margin compression within the advertising business? Thank you.

Ross, on the first question, I would say overall when I look across Google and Alphabet, the number of areas where we have been able to build world-class products and achieve scale and success, we today have over seven products which serve 1 billion users each, so I think our track record speaks there. And we generally want to encourage a culture of innovation and that's what we focus on, and I think it is fine that some of them happen outside. So we don't view it as a zero-sum game, and we're very comfortable with how we approach it.

And then in terms of the margin trends, so overall operating margins year on year are up modestly on both a GAAP and non-GAAP basis, and that primarily reflects trends in Other Bets. I think your question was probably more within Google. The operating margin on a non-GAAP basis is down modestly year on year. That's primarily to other cost of sales as distinct from TAC. The Google GAAP operating margins year on year and quarter on quarter do reflect the impact of the equity refresh that we called out last quarter that I talked about. I think one of the core things to your question is just how we're looking at it, and our view continues to be that given the breadth of opportunities and our commitment to long-term revenue growth, as we've talked about, quarter after quarter we do remain committed to investing in this growing set of opportunities. And we've spent a lot of time trying to manage that revenue growth, and as I said, manage expense growth with the utmost respect for the resources deployed and getting the best return on those resources. So there are a number of different factors in here. I think I mentioned one of the things as you're looking forward was the sales and marketing. And just to make another point, which I said my opening comments, we do expect ongoing gross margin pressure from higher TAC associated with Mobile Search and with programmatic. That does still result in more revenue and gross profit dollars but at a lower margin, and that's the other really important point with our starting point. We are continuing to invest, and we would point you to the revenue and gross profit dollars that come from that.

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

Thanks. With Google Home and the Pixel phones, are you rethinking at all your go-to-market strategy in terms of distribution and marketing? Google over the years has put out different hardware products. Have there been learnings from that that make you approach those two particular areas in Google Home and the Pixel phone lineup differently? Thank you.

Thanks, Mark. As you point out, we have done hardware products over the years, but we saw an opportunity to bring all our display hardware efforts together in a thoughtful structure. I'm glad Rick [Osterloh] is here, and we've been very focused on how we approach everything end to end so that we can bring together software and hardware for a great user experience. So along those lines, both Google Home in Google Pixel are important new efforts for us, and I think we will thoughtfully evolve our go-to-market strategy as well. These are important areas. And you already see with Google Pixel we have a deep partnership at Verizon with which we are going to market in the U.S. And so we are constantly thinking about how to do this well, and you will see new approaches as we go through it more.

Thank you, Sundar.

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

Thanks for taking the question. Sundar, you talked about a lot of products across advertising and hardware. I think one thing we did not hear about was Maps. And I think you've talked about it in the past as 1 billion-plus users and pretty massive engagement. So can you talk a little bit more about the monetization strategy here and how you can really sell more advertising here but also preserve the user experience at the same time? And maybe talk about a timeframe that we could see more here. Thanks.

That's a good question. Today, a big part of what you're seeing with our transition to mobile that's working really well. The reason Mobile Search and mobile monetization works really well for us is because a lot of it is inherently local by nature. And the thing which helps us deliver a great local search experience is Maps. And so that's the direction we have always pointed in. We want it to be a great experience for consumers as Google Maps, but in terms of also really enhancing the local search experience. And I think you'll continue to see us perceive it that way. And over time to the extent there are opportunities to create value within the application itself, we'll pursue that as well.

Thank you. And our next question comes from Peter Stabler of Wells Fargo Securities. Your line is now open.

Good afternoon, thanks for taking the question. I wanted to ask one about Voice. Sundar, you talked about the success you've had in improving your natural language recognition, and we know that voice queries are growing quickly. I'm wondering if you could share your thoughts on how the increase in voice queries may or may not impact monetization going forward. Is it a risk, or is the growth of voice queries much more skewed to less commercial activity? Just any thoughts there, thanks so much.

Thanks, Peter. From my standpoint, I look at it as – and if you look back in time, all this is – computing is becoming more and more important to people, and so they are engaging with it more and more. So as we went from desktops to mobile, it's not like one replaced the other. The sum total of all of this, it expanded the pie. I approach this the same way. I think as I see people using Voice, et cetera, they are interacting more with computing and with Google too. So we view this as providing users more access across many different surfaces, many different contexts, being there for them when they need it. So in that view, I think it will all be a big positive for us going forward.

Thank you.

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

Thanks for taking my question. I have two. Just to go back to the Voice Search question, Sundar, could you just talk a little bit about if we do continue to migrate toward a world of Voice Search, just talk about infrastructure, potential build you think you need to put in place to continue to monetize search in a voice world as well as you do in a phone or a desktop world. And then secondly, could you just talk a little bit about where you are on the rollout of extended text ads? I know you talked about a 20% bump to click-through rates. I was just curious for where you are now, a push-out, and is there any update on the click-throughs? Thanks.

On the first question, I think I briefly answered it before. In terms of – we are thinking about the voice experience deeply end to end. A lot of it is going – because of how we are approaching our core investments both from a software and hardware standpoint, so we leverage it all to make it better. So for example, even things like TP usage we talked about at Google I/O play a role into something like Voice Search you're talking about. And as we evolve the Google Assistant, I think voice is going to play a major role that way as well. So we are in very early days of all of this in relation to our overall volumes we see, and so I think we will be thoughtful about it. For example, the Assistant team talked about conversational actions as a way by which we can integrate third parties into the Voice experience. So it's early days, and I think we will evolve it a lot in the coming years. In terms of your second question around expanded text ads, I would say again it's early. It's being adopted by advertisers across the board. We see both large and small advertisers using it. For us, we find advertisers who actually spend their time being thoughtful about the ad creatives and extensively testing and optimizing for this new format, they find strong performance. So we are pleased with the progress so far, but the transition is going to take some time as advertisers get comfortable with it, but we are excited about it.

Great, thanks.

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

Good afternoon and thanks for taking my questions. First one for Ruth, heading into this quarter's results, you had called out the ad format change in the third quarter of last year, which had driven a step up in the year-ago growth rate. I wonder, is there anything specific on the revenue side that you'd like to call out in terms of comparisons versus the fourth quarter of last year as we try to calibrate our revenue expectations for the fourth quarter, either in terms of Mobile Search, YouTube, or ad tech programmatic? And then my second question is either for Ruth or Sundar. Can you just talk about the decision to pause efforts for Google Fiber? I'm wondering, was that decision more about financial discipline, as you I think explained, Ruth, in your prepared remarks for the Other Bets, or does it more have to do with the shift to wireless Internet technology or point-to-point wireless, which ultimately can take the place of a Fiber or facilities-based infrastructure over time? Thank you.

Okay, great, two good questions. So in terms of Sites revenue, we are very pleased by the strength. It was broad-based. It had two real drivers, first, our ongoing focus on improving the experience for advertisers and users. And we introduced a number of enhancements, including format changes in ad tools. I think the most important point is that no one enhancement came close to the magnitude of the changes that we made in the third quarter of last year. That's why we kept calling out the 2015 change. And what's been gratifying is in the aggregate the results reflect the benefit of ongoing innovation. But very importantly, it wasn't one particular item. The second contributor is the secular shift to mobile, and we continue to benefit from that, be an important part of enhancing opportunities for engagement. As we look forward to the fourth quarter, I think that was part of your question as well. I think the only thing to point out is that in looking at growth rates, we're obviously at a higher revenue base versus last year, so that to us is an important point. It may be obvious, but important to note there. In terms of Fiber, the impetus for it was really about the opportunities that we see to focus on innovation, and what does that mean if the objective with Other Bets is really these 10X opportunities. And when you go back to the initial impetus for creating the business, it was the founders' view that there's a sizable opportunity given the need for abundant connectivity on networks that are always fast and always open, and we do continue to be committed to that vision. The team had some important breakthroughs in new technologies. You noted the most important in our view, all that we're doing with wireless, but also technologies that are key to implementation. And we believe that both of those, a number of things they're doing enhance both our effectiveness and efficiency. And so we wanted to focus on the potential with these efforts before we reaccelerate deployment. And it was about ensuring that we can take advantage of those before again pushing forth. We were very active in a lot of cities in the third quarter alone. We rolled out four new cities, so that brings us to 12 cities across the U.S. where we're deployed, in construction, or in development, and we're making great progress in those cities. We remain very committed to growth across those cities. And then we also have a presence in six cities with our wireless acquisition, Webpass. So we're pausing for now our work in eight cities where we've been in exploratory discussions. But very much to your question, it's to better integrate some of the technology work we've been developing, and there's more detail on the cities on the Fiber side to the extent you want to go into those.

Great. Thanks, Ruth.

Thank you. And our next question comes from Stephen Ju of Credit Suisse. Your line is now open. Stephen Ju - Credit Suisse Securities (USA) LLC (Broker) Okay, thank you very much. So, Sundar, it seems like from the outside looking in, the pace of product development and release seems to have accelerated, while at the same time it seems like you're gaining efficiencies with the assets you're deploying to run your business and as your CapEx growth is moderating. So I'm wondering what concrete steps you may have taken to increase productivity or focus at the company and what you're doing now to continue to drive those gains going forward. Then separately, as you called out earlier, you are shipping an unprecedented amount of hardware devices. So as you think about what your product portfolio might look like over the next five years or even the next decade, does the Pixel phone market change in direction for Google to become maybe more of an integrated software and hardware company? Thanks.

Thanks, Stephen. On the first thing, I would say we are very focused on our core mission. And we see a huge opportunity to do that in a unique way, thanks to what we view as a point of inflection with machine learning. So refocusing the company on a set of initiatives, recognizing that point of inflection is what has helped us really focus on things. And things like the Google Assistant are a manifestation of that, and you will see us continue to stay focused and innovate that way. In terms of hardware, I think in our vision, computing is becoming more and more integral. It's going to be there for users in many different contexts. And so to really think and evolve it, you need to think about software and hardware together. That's where a lot of innovations happen. And so for us to push the paradigm, push the boundary, we are very committed to doing that. So it's a thoughtful effort from us. But overall, as I said in my remarks, we deeply remain committed to building an open ecosystem because at the end of the day we want Google to be there for every user everywhere. And to do that well, we want to work with partners and build a great ecosystem to make it happen.

And just to add a bit more to Sundar's first answer or first response to your question about efficiency as it's expressed through CapEx spend, I think it will probably be helpful to add. The pace of spend reflects the ongoing success of the team driving meaningful efficiencies in planning and operations for our technical infrastructure. And that's enabled us to support growing demand but at a stable investment level. We've talked about that on prior calls as well, but I think we're proud of what they've been doing there. Some examples of efficiencies include improvements in server utilization and the use of machine learning that Sundar has talked about, and the deployment of innovations like our Tensor Processing Units that he has commented. So the main thing is we're building greater productivity with existing machines. And what's important to note is that's not only good for Google products generally, but it's also valuable to our cloud offering for our enterprise customers. Stephen Ju - Credit Suisse Securities (USA) LLC (Broker) Thank you.

Thank you. And our next question comes from Ken Sena of Evercore ISI. Your line is now open.

Thank you. Sundar, you mentioned a point of inflection within machine learning. Can you talk a bit more about the trade-offs in the productization and sale of that inflection through Google Cloud versus leveraging that innovation yourself through Google Assistant? And maybe for Ruth, just any thoughts on potential future disclosures around the cloud business, that would be great. Thank you.

On the first one, look, I think we are – it's a big platform shift, and it has to be available for everyone. So we've always, just like we have done with things like Android, when we see platform shifts, we provide Android to everyone. So that's the way we think about Google Cloud. We want to make sure that all these new capabilities for machine learning and AI are available through Google Cloud to all our partners. We don't see it as a zero-sum game. I think internally, core to our mission, we see areas where we can execute and we will continue to do that, but we want to do both and we can do it thoughtfully well.

On your second question, we constantly look to assess if or when additional data makes sense given specific performances. And when we went through the third quarter results, that has been our intent with all of the color commentary on cloud. I guess the only other thing to add is that the largest percentage growth year on year in our other revenue line, actually even across all of our revenue lines, was in our Google Cloud platform, and that reflects significant momentum in compute and storage.

Thank you.

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

Thank you. Sundar, I apologize if I missed it. But could you talk about machine learning in search and how much it's making a difference over the past few quarters and how much you still have to go, how important that is to revenues? And then, Ruth, a couple questions, any thoughts on whether hardware sales could make a difference to margins going forward, and also on the stock-based comp, how Google thinks about that expense internally? Thank you.

On machine learning, in areas like search and even ads, on search we've had an effort called RankBrain, which is bringing Google Brain in the context of search. And we've made great progress on it, but I would still characterize it as very early stages in terms of the long-term impact we can have. Generally and similarly, we are in very, very early stages of incorporating machine learning, the newer machine learning systems in ads. And again, that's the beginning of a long journey as well. Overall, I think all of these systems are incredibly complex systems, and they are handcrafted systems over many, many years. And so over time, I think machine learning will surface newer approaches and newer insights. And so we see it as a huge area of opportunity, but it will play out over a period of time.

And then in terms of the hardware family, I think Sundar has given a lot of color on that. It's still early days with the rollout of some of these newer lines that we're super-excited about. And so early to make a call on that, but certainly investing meaningfully in the line given the importance we see in this. And then in terms of stock-based compensation, we've always said we're going to remain focused on long-term revenue growth, and that does require investing in talent. And we do believe equity ownership is a really valuable part of our overall compensation, consistent with alignment of interests. It's something we keep an eye on and we're mindful of the full cost of equity-based compensation and certainly look at that as part of the overall costs that we're investing in, in and across the businesses.

Thank you.

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

Hey, guys. Good afternoon, thanks for taking the question. Sundar, last month Google was part of the founding group for the Partnership for AI. And I was just curious to hear your thoughts on what your goals are for the group and how you may take lessons back to your leadership at Google. Thanks.

Look, I think I'm very, very glad to see the group come together. We are in extraordinarily early days for AI and it's super-important, but we approach it thoughtfully as an industry. I am encouraged to see the commitment across these companies. Our goal is to promote open collaboration, help the public understand AI, and establish best practices in R&D. Without something like this, I think ideas would develop in silos, and so I think it's good to do this to promote an informed dialogue on AI. And so I'm pretty excited all along, just like with TensorFlow, where we are doing this in an open way and all the other things we have done at Google. I think it's important as we work on new technology to contribute and to give back. And so in that context, I think all of this is personally very meaningful to me.

Great. Thanks, Sundar.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Ellen West (53:46) for any further remarks.

Thanks to everyone for joining us today. We look forward to speaking with you again on our fourth quarter 2016 call. Thank you and have a good day.

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.