Good day, ladies and gentlemen, and welcome to the Alphabet Fourth 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. As a reminder, today's conference call is being recorded. I would 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 fourth 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 Ingrid Michaelson. In just a decade, she has released six albums, five of which have charted. The song you just heard, Celebrate, is from her latest release titled, "It Doesn't Have To Make Sense". Please check out her YouTube channel. 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. Our revenue of $26.1 billion in the fourth quarter underscores the continued excellent performance of our businesses globally. For the fourth quarter, our consolidated revenue grew 24% in constant currency versus 4Q 2015, notwithstanding a challenging year-on-year comparison. Advertising revenue growth was driven by Mobile Search with ongoing strength in YouTube and programmatic. We also had substantial growth in other revenues from hardware, Play and Cloud. Our outline for today's call is first, I'll review the quarter on a consolidated basis for Alphabet. Given the obvious seasonality in Q4, I'll focus on year-over-year changes in our results. You can find quarterly comparisons in the earnings release. Second, I'll review the results for Google and then Other Bets. Finally, I will conclude with a summary of the full-year results and our outlook. Sundar will then review our business and product highlights for the quarter, after which we will take questions. Let me start with a summary of Alphabet's consolidated financial performance for the quarter. Total revenue was $26.1 billion, up 22% year-over-year. We realized a negative currency impact on our revenues year-over-year of $202 million or $15 million after the benefit of our hedging program. Holding currency constant to the prior period, our total revenue grew 24% year-over-year. Alphabet revenues by geography highlight the strength of our business around the globe. U.S. revenue was up 24% year-over-year to $12.7 billion. U.K. revenue was up 7% year-over-year to $2.1 billion, reflecting the continued weakness of the British pound relative to last year. In fixed FX terms, the U.K. grew 21% year-over-year. Rest of world revenue was up 24% versus last year to $11.3 billion. In fixed FX terms, revenues were up 26% year-over-year. GAAP other cost of revenues was $5.8 billion, up 41% year-over-year. Non-GAAP other cost of revenues was…

Thanks, Ruth. 2016 was a great year for Google, and 2017 is shaping up to be even more exciting. This quarter was about the business firing on all cylinders and terrific progress across Google's newer areas of investment. Today, I'm going to talk about three things. First, the key trend powering Google today, machine learning and how it's improving our products and creating lots of opportunities. In particular, how it's underpinning our core mission of providing access to information for everyone, especially via the Google Assistant, which is off to a great start. Second, I want to talk about three of our biggest bets, YouTube, Cloud and hardware, where we are making great progress. And third, I'll discuss the great trends we are seeing across the platforms; our vibrant computing platforms, Android, Chrome and Daydream, strong momentum in Google Play, as well as our thriving advertising platform. First, machine learning and access to information. As I've shared before, computing is moving from a mobile-first to AI-first with more universal ambient and intelligent computing that you can interact with naturally, all made smarter by the progress we are making with machine learning. 2016 was the year that this became central to who we are as a company and the products that we built. We had more than 350 launches powered by machine learning across areas like search, maps, messaging and Google Play. You've heard lots of these examples; easier e-mail replies and inbox, better YouTube recommendations, the incredible cameras on our Pixel phones, and smarter bidding for advertisers in AdWords. A centerpiece of our machine learning efforts is the Google Assistant which allows users to have a natural conversation with Google to help them get things done across their experience. It's off to a great start. You can easily ask it…

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

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

Great. Thank you. I had a question for Sundar. I was wondering, I wanted to focus on the cloud business. When we speak with CIOs about GCP, they highlight in many cases the need for Google to improve upon its enterprise sales strategy. I'm just wondering if you could share with us the changes you've been making in that organization and the goals that you have for the cloud business for 2017.

Thanks, Heather. As I said in my opening remarks, I do think we have seen tremendous momentum at our partnerships team and how we are approaching. There are a lot of new alliances which I talked about. So now we have teams dedicated to partnering with GSIs and we have a team focused on technology partnerships too. On the GSI front, we announced a new alliance with Accenture last September to create industry solutions for a number of industries including retail. So for me, I think, overall, everywhere I look at we are establishing a world-class enterprise team. Partnerships has been a big focus and I've seen progress there. I think as I said in my remarks, overall, 2017 I expect to have a lot of momentum because we have moved well beyond the table stakes. Now, we are really competing on areas which we think we have differentiation. I talked about data analytics and machine learning, security and so on. So I think we are well-positioned. The momentum when we look at the numbers internally and as well as the traction we see in competitive situations, I definitely think we are going to have a great year and hopefully in the next conference coming up, Diane and team will share a lot more details.

Thank you.

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

Thank you for taking the questions. Maybe first for Sundar. Now that you have this breadth of device ecosystem out there into the marketplace, wanted to know if we get a little bit more color around what your learnings are about the adoption of the device ecosystem, how you're thinking about the go-to-market strategy over the medium to long-term and how we might see sort of an evolution across operating systems? And if I can, maybe one for Ruth, you called out a one-time charge in – or one-time impact on the number in the quarter. I wanted to get a little more granularity about what went into that one-time expense so we could just sort of factor that into the financials. Thank you.

Hey, Eric. I'm assuming when you said the device ecosystem you're talking about how our platforms are working at scale. The thing which I get excited about is computing is increasingly moving rather than just one device which is a dedicated computing device to being there for users in their context and you'll see computing increasingly embedded in many things, and we have a comprehensive strategy. We do want – we invest in it for the long run. We're improving our computing experiences with machine learning. We expect to be there for users across a device ecosystem, and we're also building things like Google Play to work across all of this so that users can have one coherent experience. I think we see great momentum both across our partner ecosystem, as well as pushing the cutting edge of the experience which is what we strive to do with our own hardware devices. And so I think the end-to-end strategy is working well for us.

And in terms of, you noted, the one-time item, there are really two that I'm actually going to call out. One was in cost of revenues, I noted that equipment costs were elevated by some one-time charges, and so there was some pressure there. And then the other item that I noted was with respect to our tax rate. I noted that there was slightly elevated tax rate this quarter. It's always affected by the geographic mix of results but we did have a discrete item that affected the U.S. tax rate to make that clear.

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

Thanks. Two questions, please. Again, Ruth, on that $320 million one-time charge, is there any more detail you can provide on that? It seems like a relatively sizable amount. And then, Sundar, if you could talk a little bit about Voice Search, particularly in the home and in the car, and the importance of getting devices out in the marketplace? And the challenge I'll throw to you is, it looks to me like Google devices are being outsold ten-to-one or something like that in most – in a lot of homes, and it's immaterial now, but it could see in five years that there's is a new Voice Search interaction interface and it's not Google in the home. That could be a real challenge for the company. Thank you.

So, on the first one trying to be helpful in giving you dimension and impact on cost of sales, but really not much more to add there. I think the other point is that you're thinking about the hardware business. It was gross margin positive. There were just some other variables in there.

And, Mark, on Voice Search, we are really excited about it. I think it's a very natural way for users to interact. We think it will be one mode. Users will have many different base by which they interact with computing. And for voice, as you pointed out, we expect voice to work across many different contexts. So we are thinking about it across phones, homes, TVs, cars, and trying to drive that ecosystem that way, and we want Google to be there for users when they need it. And even with Google Home, we just launched it in Q4. We had a very strong quarter there, and we are going to invest a lot in it over 2017. It's very early days. When I look at what it would take to Voice Search well, our years of progress we have done in areas like natural language processing comes into play, and I think there's a lot of work ahead to make all of this work well for users. And this is the core area where we've invested in for the very long term, and so I feel very comfortable about how this will play out in the future.

Thank you.

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

Thanks for taking the question. Ruth, you commented on YouTube and addressed some of the non-advertising revenue streams. I was just hoping you could elaborate there a little bit what the goals would be there for your users. And then just to follow up on Mark's question on Voice Search, I understand, Sundar, it's early, but how do you think about the challenges and opportunities from a monetization perspective in Voice? Thanks.

So on the first question in terms of YouTube, Sundar elaborated on my opening comments. We're really pleased with the ongoing strength we have there. We talked about on prior calls. It's largely driven by Video, primarily TrueView with a strong contribution from DoubleClick Bid Manager, and we are continuing to invest significantly in the business given the importance of supporting the ecosystem of content creators through partner payments, marketing, YouTube Originals, YouTube Spaces. We're broadening the platform. We're investing in the requisite infrastructure given machines and bandwidth required, and Sundar elaborated on some of the upside we see there on the non-ad side. And really the point I was trying to stress consistent with Sundar's comments is, we've got the non-ads momentum here on the YouTube side, and we're also seeing tremendous momentum with cloud, which we're excited about, and the hardware and investing behind those. So those continue to build out the revenue streams as we're looking in the near to medium to long term.

And, Doug, I mean, just like Mark's question on Voice Search, I would encourage you to think about it as from a user standpoint, they are looking for information, looking to get things done. The voice queries are one part of the total journey they are on. So when we think about something like the Google Assistant, we think about it as an ongoing conversation with our users across different contexts. So they may ask a question on voice, later when they pick up their phone, they want continuity, so we think of this as an end-to-end thing. And all of this means users engage more with us, more with computing and look for more information, and I think the trends we see are positive. So we think about it from a long-term perspective, and so I see more opportunity than challenge when I think about Voice Search.

Great. Thank you.

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

Thanks very much. Another one on YouTube, if I could. Would it be possible to get any sort of metrics around YouTube Red and how the subscription business has been progressing, realizing you're not going to be providing that every quarter but that you do occasionally give us some sort of benchmarks in the market? Thanks so much.

Well, at this point, we've launched in five countries. We're pleased with the early success and it's still early days, it takes a while to build a subscription business here. And I'll pass it to Sundar for additional commentary.

Look, I mean, I think – I would think about it as, we are investing a lot in developing this premium experience in a way of YouTube Brand, YouTube Music, and we do offer it across Google Play Music as well. You will see us invest more, more countries, more original content, and we'll bring together the experiences we have over the course of this year. So it's even more compelling for users. But we are seeing tractions with the rate of signups. We're not disclosing specific numbers, but I'm excited at the progress there.

Thank you.

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

Thanks for taking my questions. I have two. The first one, just to go back to YouTube, I appreciate the color around the content. I'd be curious to hear about how you think philosophically about partnering with more premium content players to maybe drive even higher engagement and an even better YouTube experience. And then the second one, if you kind of step back in your Mobile Search business and the verticals, the innovation you've had at retail and travel with Shopping and Hotel Finder, I guess I'd be curious to hear about where you see the biggest potential for more improvements in certain verticals for an even more relevant and higher search result experience over the next years. Thanks.

On your first question, look, I mean, we think of YouTube again as an ecosystem. We are trying to connect creators with users, form a community. And so, we work hard to bring more premium content. We already work with TV networks and their individual shows, whether it's a late-night show like James Corden or Jimmy Fallon, afternoon shows like Ellen, sports programming like NBA and NFL. For example, sports is one of the most popular verticals. We have hundreds of sports partnership in place, and so we'll continue to invest that way and drive the premium content there. On the second one, we do look at the end-to-end experience, look at what are the kinds of tasks which users are trying to get done. Mobile raises the bar if you want to provide those deeper experiences for users. And so, I generally think local is a big area. We have strong assets there with Maps, and so we think about how we can improve the local experience a lot more for users. So for example, within local areas like dining, we work closely with our partners to make that better. So we get it at a pretty granular level and we try to hit all the areas. And so, I think you'll see progress in all these areas over the next few years.

Okay, great. Thanks.

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

Hi. Thanks for taking my questions. Yeah, just on YouTube, I'd love to hear about the pricing and then also about AdMob (44:47). So, is there anything you could highlight on ad format? And specifically, we noticed that recently you're enabling marketers to target YouTube ads based on search, and so I just want to hear about that strategy. And maybe relatedly, the recently announced non-skippable YouTube ads format. Would love to kind of hear about that. Thanks for taking my questions.

Look, overall, I would say there's been a – been very pleased with how the team has been driving innovation in ad formats and ad experiences. I think video advertising is in its very early days. We see whenever we (45:32) innovation phase, and advertiser response to all these new formats has been really positive. So for example a bumper ads are six second video format that we launched. It's already being used by thousands of accounts, including major brands like Universal Pictures and Netflix. On your question around how we think about the experience across screens, it's really important to understand users consume YouTube across screens, and so they experience consistent experience. And similarly, from an advertising standpoint, we want that to be thoughtful for users, more relevant across screens as well. And so that's the context in which we do this. We give users control over that experience. But I do think as part of these changes, advertisers can get more detailed insights from their YouTube campaigns across devices so they can better understand the impact of their marketing campaigns. So I think it's early days, but I think it's the right direction, and I think we will see good traction from it.

Thanks a lot.

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

Thanks. I have two, one for Sundar and one for Ruth. Sundar, just picking on the YouTube questions, there was a report that YouTube and CBS had agreed on an agreement to distribute CBS on YouTube. Can you talk a bit if that has actually happened? And if so, what's the opportunity to partner with networks and how will that evolve over time?

Look, I can't comment on any specific discussions, but I said a little bit earlier we are constantly working with partners across these areas. We work very closely with TV networks on their individual shows. It's a big part of the YouTube experience. And so you will see us work hard to make these partnerships deeper and bring more content to our users. So maybe I'll leave it at that.

Okay. And then for Ruth, you mentioned programmatic drove the network members' revenue growth this quarter. If you look at fourth quarter this year and last year, there seems to be an acceleration in Q4 and then it comes back. I wonder what's happening seasonally to that revenue line that drives fourth quarter up so much.

Well, as we've talked about on prior calls, there are obviously a number of businesses within the network line, and a number of things went right this quarter. I wouldn't extrapolate from it. As you know, there can be some seasonality, and Q1 is typically lower than the fourth quarter. I think the main point is that the programmatic business continues to be a strong contributor with significant growth reflecting the ongoing advertiser adoption just given the overall efficiency of programmatic and improved targeting and the benefit of inventory growth. And so the story, it's pretty much unchanged. We continue to see the growth in programmatic offset by declines in the more traditional businesses. And when you're looking at the quarter-over-quarter, we are continuing to see things like the impact of policy changes and timing of product launches. But I just think that there were a number of things that went well this quarter. Q3 was a bit lighter so that's been flatter quarter-over-quarter comparison, but I wouldn't extrapolate from this.

Okay. Thanks.

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

Thanks. Wondering, Sundar, if you can just give us a sense on the Pixel phone hardware opportunity to kind of build direct mobile distribution and capture hardware margin, and how you think about that versus the potential disruption that having your own handset at a bigger scale could cause in the Android ecosystem? Do you think this is something that could get meaningful market share without disrupting the ecosystem? And then a second follow-up related to this would be on the Pixel phones with Google Assistant having been built uniquely into the core of the experience, is there anything you're learning as the usage of that increases? Is it driving a step-function, increasing engagement with the hardware/software integration? Thanks.

Look, I mean, we are in the early days. I think it's really important when you work on a platform you have to drive it forward as we've always done by putting out the state-of-the-art and I think it especially gets important in the vision we have for computing where users are going to use it across many different contexts. And so to do that end-to-end experience, it spans devices. So I think it's important for us to work at the intersection of hardware, software and services and so that's how we think about it. And I think we invest a lot more in our ecosystem and I mentioned earlier, I'm incredibly excited at the lineup we have for this year from our partners. So we do both and we are very thoughtful about it. I think the scale at which we are doing it shows it's working and I'm confident we'll be able to strike that balance well. In terms of Google Assistant on the Pixel along with how search works, I think definitely it gives us a way to iterate and move faster and make sure it's working better for users. Our thesis is that as we make it easier for users to have Google at their fingertips across what they are doing and including many modes whether they are typing or asking Google a question, we find that it overall benefits. And so it will be a long-term trend but I think our earlier studies (51:44) show that our intuition is right there and so we'll continue approaching it that way.

Thank you.

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. So, Sundar, you called out Google Play growth in emerging markets in your prepared remarks. So I thought from a revenue size standpoint it would be one of the big bets you would highlight but – so I'm wondering how you view your own Instant Apps as well as the products or their operators to let consumers try apps either in a messenger product or on an HTML5 environment? Do these innovations present an opportunity or a challenge for you at the Play franchise? And secondarily, it seems that the recurring theme in your prepared remarks is how AI is making the consumer products better. Is there anything you can share with us as to how it may be making monetization better? Thank you.

So, on Google Play, for me what makes it work well is just with the vision of computing we have been talking about how it works across contexts. You need an ecosystem. You need an apps and services ecosystem to work cohesively across all of this and that's what I like about how we are approaching Google Play and you saw us this quarter – see Google Play work beyond Android phones. They're coming to Chromebooks. They work in Daydream, they work in Android Wear and so it's an end-to-end thing which works well. And that's the most important thing so that as a user, you know whether you're engaging with a game or a TV show that you can reliably get it across your computing experiences. And we'll adapt and I think we will drive innovation simply to go where what's right for users and developers and so be it Instant Apps or driving better HTML5 experiences. We invest in all that and I think we'll move it all forward. On your second question about how machine learning and AI is improving our monetization, it definitely, I mean, just like we had many, many launches last year which involve machine learning being incorporated across Google including our monetization products. Our monetization teams at Google have always been at the cutting edge of what I would call as machine learning techniques from early days on. And so they are doing it. It is early days now but I think we already have really new insights and so we'll bake it in over the course of the year. Stephen Ju - Credit Suisse Securities (USA) LLC (Broker) Thank you.

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

Hi. Just maybe another question on YouTube. Can you expound a decision this quarter to remove third-party cookie and Pixel activity? It looks as though you're favoring something much more identity-based and maybe you could just think through the – or explain a bit about the impetus there and maybe the trade-offs for marketers, that would be great. Thank you very much.

I spoke about it a bit earlier, but I think it's important that we evolve all of this from a user-centric standpoint, and users have an identity, they have preferences. And so for example, think about it from a user standpoint. If they don't like one particular ad or they don't want to see an ad from a particular advertiser. They want it to work across their experience, across their cross-device experience. So we think about it that way, and so we are working towards a long-term experience that's right for users and which I think will make sense for advertisers reaching users too. So I think we are evolving it jointly and thoughtfully, giving users control. And I think that's the right way to approach it over time.

Okay. Thank you very much.

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

Thank you. I'd like to ask first a question about ad coverage and click rates. Maybe just your thoughts on potential to increase ad coverage now that you have a fourth link. Is there still room to help ad clicks with coverage increases? And just as you think out to this year, how do you feel about the innovation pipeline in ads? Do you think there's a lot more you can still do in Search? And then two, housekeeping for you, Ruth. Maybe you could just let us know what kind of equipment was written off so we can think about how recurring that might be, and any comment on the buyback activity in the quarter? Thank you.

On our monetization efforts, our teams always have been very thoughtful about planning not just for the short-term but planning for the long-term. We don't start the year thinking our plan is to increase ad coverage or something like that, right? We have many experiments in the pipeline. We see how user behavior is evolving and in conjunction with that, we evolve our ad experience. So for example, as people use mobile, scroll more, it's to track the user behavior changes, and we adapt to that in a very, very disciplined way. So last year, you saw us maybe increase coverage in a certain way. For example, in desktop, we removed ads on the right-hand side, and so we take a very holistic approach to these things. For me, I do think we have a lot of headroom ahead. I still look at where most of transactions happen and how that secular transformation is underway, and so I think we see we have a lot more headroom left. And Ruth, I'll pass...

And – yeah, in terms of your second question, really not much more to add on the first part. In terms of the buyback, we weren't able to commence it in the fourth quarter due to trading restrictions but we do look forward to getting back into the market.

Thank you.

Thank you. And I'm showing no further questions at this time.

Thanks, everyone, for joining us today. We look forward to speaking with you again on our first quarter 2017 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.