Good day, ladies and gentlemen, and welcome to the Alphabet Second Quarter 2019 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 be given at that time. I'd now like to turn the conference over to Ellen West, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon everyone and welcome to Alphabet's second quarter 2019 earnings conference call. With us today are Sundar Pichai and Ruth Porat.

Thanks Ellen. Q2 was an exciting quarter at Google. We made several big announcements at I/O, YouTube's Brandcast, and Google Marketing Live. They're all part of our broader vision to build a more helpful Google for everyone. When we say everyone, we mean users, developers, creators, partners, advertisers, and all the customers of our growing cloud business, and the communities we call Home. From the beginning, Google's mission has been to organize the world's information and make it universally accessible and useful. Over the years, we have evolved from a company that helps people find answers to a company that helps you get things done. Today, I'll share how we are approaching this work. Building a more helpful Google starts with advancing our core information mission. In Q2, we have made a number of improvements to our founding product, Search. We redesigned our mobile search page and brought our popular full coverage feature to search to better organize news results. We are also integrating augmented reality into Search. So, if say, you're searching for new shoes online, you can view the shoes in 3D or even superimpose them onto your wardrobe to see if they match. Thanks to advancements in AI, we are making significant improvements to the Google Assistant. The next-generation Assistant, can process requests up to 10 times faster, making it easier to multi-task, compose e-mails, and even work offline. With features like Duplex on the web, that system will soon be able to help users book rental cars and buy movie tickets. If you are searching for the fastest way home, Google Maps will now tell you when your bus is delayed or how packed your next train will be. We have rolled this out to people in 200 cities worldwide.

Thank you, Sundar. In the second quarter, total revenues of $38.9 billion were up 19% year-on-year and up 22% in constant currency. Once again, our results were driven by ongoing strength in mobile search, in particular, as well as YouTube and Cloud. I will begin with a review of results for the quarter on a consolidated basis for Alphabet focusing on year-over-year changes. I will then review results for Google, followed by Other Bets and we'll include with our outlook. We will then take your questions. Let me start with a summary of Alphabet's consolidated financial performance for the quarter. Our total revenues of $38.9 billion reflect an acceleration in both reported and constant currency revenue growth across all regions compared with the first quarter. Details of our results by geographic region are available in our earnings press release. Turning to profitability. On a consolidated basis, total cost of revenues, including TAC, which I will discuss in the Google segment, was $17.3 billion, up 25% year-on-year. Other cost of revenues on a consolidated basis was $10.1 billion, up 35% year-over-year, primarily driven by Google-related expenses.

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

Thanks for taking the question. And really appreciate all the additional commentary and disclosure in the remarks. I think investors will find that really helpful. Sundar maybe could you, one bigger picture question. A lot of innovation on the product side in the early part of this year. Now those products are going to start getting rolled out in the back part of this year and into 2020. Can you give us a little bit of additional color on what some of the key investments you're making, some of the key themes you're trying to drive after in terms of pushing the organization to collaborate on product launches and leveraging the strength within Google? And then the second part of the question would be, as you lower friction for consumers on the product side, what are you hearing from advertisers on the monetization site about how those product might resonate on the monetization piece? Thank you so much.

Thanks Eric. On -- in terms of the key investments, we still continue. We have been focused on our investments in AI. So that continues to be kind of a foundational investment we are making across the board, including getting a lot of our engineers trained on AI techniques et cetera across the board. So it's an important area we are focused on. And making sure, digging deeper to push our products to be more helpful is the main theme, by which we are evaluating everything we do. Beyond that be it, the focus on cloud has been a big part of it, continuing to scale up YouTube including being focused on content responsibility. These are all some of the key things we are doing. And of course deep focus on Search and Assistant being a core part of everything we do. In terms of the work we are doing on consumers and the impact it has on monetization. And I do think they go hand-in-hand as we are making the experience better for customers, including on products like Discover. So just getting information to them more seamlessly when they need it, I think they all tend to have a commercial aspect at the right intent when users are interested in it. And so we always see them go hand-to-hand. And so taking a long-term view, I think it will resonate on the monetization side as well.

And just building a bit of that question and the impact from some of the announcements that you've seen from us. To just comment a bit on the impact from Google Marketing Live that Sundar referenced at the outset. I think what's notable here is that every year at GML, we announced new changes to products and features and most ads product launches are introduced in phases as advertisers initially experiment with new formats. And so as a result the new products that were announced at GML typically are adopted over time. And so I just wanted to add in here because while we're excited about the new ads products we announced to GML last quarter, given they offer great new user experiences across new services, we don't view this year's slate of launches differently from introductions made in previous years.

Thank you.

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

Great. Thanks for taking the question. I was just hoping Ruth, you could just talk a bit more about the accelerating growth that you saw in 2Q relative to the slowdown that we saw in 1Q. It seems certainly in the previous quarter to skew more to the Google Search site than YouTube. I was just hoping you could provide little more clarity on maybe how the product changes that you've talked about in the past played out across 1Q and 2Q. And then just Sundar on user privacy and control over data, that was certainly a key theme across the multiple events in 2Q. Can you just talk about how you balance those initiatives as you're rolling out products going forward? Thanks.

So, starting first with the strength in sites revenue. The strength we talked about here this quarter reflects the same underlying trends that we discussed previously. And I tried to really call that out in opening comments. And part is the benefit from applying machine learning to both the user and advertiser experience. And it really just -- I'm echoing a lot of what we said in prior quarters the last quarters where we remain very positive about the opportunity set. We introduced product changes only after extensive testing, which means there can be some variability in quarterly growth rates as you've seen, but are very positive about the opportunity set. And overall as it relates to both Search and YouTube strength, I would just to add on YouTube revenue growth for YouTube was strong in the first quarter. In fact, we called it out as the second largest driver of revenue growth across Alphabet. And in the second quarter, YouTube was again the second largest contributor of revenue growth. And really pleased with the ongoing momentum that we're seeing here.

On user privacy and control, it's always been a big focus for us in some of the things we recently announced. Initiative is underway for example like federated learning for almost three years. So, going forward, I think you'll continue to see us focus on. I think it's one of the most important areas we are working on. But I think with AI, we are excited that we can give better experiences for users with less data over time. And those are the kind of directions we are pushing. We are also -- you'll see us continue to work hard to simplify user understanding of how their data is used and giving them better controls and making it more easy for them to manage and making sure more users actually exercise those controls. So, those are all our goals and we'll continue focusing on that as we move forward.

Thank you both.

Thank you. And our next question comes from Stephen Ju from Credit Suisse. Your line is now open.

Okay. Thank you. So, Ruth in regards to the Cloud $8 billion annual run rate commentary, just wondering if we can get some clarifications there. Does this include GCP as well as G Suite? And further is this apples-to-apples to I guess the $1 billion that you -- I think Sundar talked about, I think that was during the fourth quarter of 2017. And any other comments you can add there in terms of the mix between I guess the more GCP versus the more traditional G Suite? Thank you.

Yes. So, it does include the entire business that Thomas Kurian is leading. Our Cloud business that includes both GCP and G Suite. And it is on an apples-to-apples basis. It continues to be the business the cloud business. We're not breaking out the components of cloud as I tried to indicate in opening comments, pleased with the performance of both GCP and G Suite. Growth in GCP was led by strong customer demand for our compute and data analytics products and G Suite continues to deliver strong growth, as I noted in the opening comments, with the results benefiting from both new pricing and growth. And overall, GCP remains one of the fastest growing businesses in Alphabet and we're really pleased with how the team is executing on both.

Thank you.

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

Great. Thank you very much. And I'll just echo people's comments about the new disclosure. That's much appreciated. So thank you so much for sharing. I wanted to ask, Sundar, how you've seen your go-to-market and partnership strategies change under Thomas? It does seem that Google has become the more friendly cloud company, if you will, from a -- when you think about partnering with other software companies. And I'm wondering if there's any tangible benefits you can point to because of this, whether it's in win rates or partner momentum or anything else that you can call out. And then, I also wanted to ask, you obviously made the acquisition of Looker recently. How are you thinking about organic versus inorganic product development? And I'm just wondering, has the thought process there changed with Thomas running the business now? Thank you.

Thanks, Heather. I appreciate it. Definitely go-to-market, Thomas has been heavily focused on it. Mainly with the realization that we are very competitive when we are there in the banks. And so, focusing on how we can scale up and really build a customer-facing organization. So, we are investing heavily, be it in sales, service, partner and operational teams. And as I mentioned in my opening comments, we are looking to triple the size of our sales force over the next few years. And we are doing it aggressively in major markets around the world. Some specifics, we did launch our new partner program Partner Advantage. The ASAP relationship has been super important to us. And so, we have really focused on that, helping many customers make us care for. Home Depot, Cardinal Health, are some examples of that. And a big part of it has been really expanding our customer-facing bench. Several new senior executive hires in addition to our new Global Head of Sales. We recently added a 25-year customer experience veteran to build out our customer support. So I think, you're good to see that focus of being -- serving customers. We have done it in our other areas. We are used to building ecosystems. If you look at an ecosystem like Android, this is what we do. And so, that's going to be a focus for us. In terms of the second question about organic and -- versus inorganic. I think we are clearly focused on the areas where we are differentiated. Data and business analytics was a key, data management and analytics is a key area for us. And as part of that, we looked at gaps we have, which would help us complete the solution offering we have there for customers. And that's what drove the Looker acquisition. So we'll be customer focused. And to the extent we see gaps there -- gaps anywhere, we'll obviously look at doing it in-house, versus whether there's an attractive opportunity outside and take it on a case-by-case basis. But that's where it will come from.

Thank you.

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

Can I try two questions, please. Ruth - first, Ruth, just any color on that 25 billion share repurchase authorization, why 25, not 20, not 30, any color there. And then, when you think about ad business. We've seen this nice acceleration in Q2, but that's kind of back to norm. There's still this question about what happened in Q1. Was there something that happened in Q1 that you needed to correct in Q2? Is it just the normal rhythms of the search in YouTube and advertising businesses? So I find Q1 still a little bit of a question mark. Q2 seems like very much the norm with the last several years. So any color on what could have transpired in Q1 then that required a fix in Q2? Thanks a lot.

I'll answer them in reverse order. I tried to comment on that last quarter and reiterated again this quarter. We are pleased with the ongoing momentum in the business. And the key point that I'll just reiterate is that as much as there is a lot of innovation going on in the business and we've talked about that, we introduced product changes only after extensive testing and that means there can be variability in quarterly growth rates as you've seen. And so we're pleased with the strength of the business. The team is extremely focused on ensuring we're delivering for users and advertisers. And as we're looking out, we talked in the past we have introduced over 100 enhancements to the user set every quarter and no unchanged drives results. And as we discussed last quarter, there can be timing variability and our view is let's ensure that we stay focused on the right things for the long-term and the quality that we can deliver. So there's really not much more to add there. And then on the capital return. I guess, the main point is we went back to this year, we're staying with the same capital allocation framework we've talked with you about before. The primary thing is we remain focused on investing for long-term growth and the primary use of capital really is to support that growth. And then the second use is really to support acquisitions and investments as we've already been talking about. And given the -- our outlook on cash, our view was that it was appropriate to step in here again. We've increased our program four times since we began the program in 2015, and pleased to have the opportunity to announce another increase here today. The $25 billion and I think the main point is we view the repurchase program as an effective use of capital.

Okay. Thanks, Ruth.

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

Thanks for taking the questions. I have two. The first one, Ruth your color on YouTube was really helpful on being the second largest driver this quarter and last quarter. I guess with that as a backdrop with the overall acceleration, can you just give us a couple examples, what types of products or advertisers segments or regions resonate particularly well on YouTube this quarter versus last quarter? And then a question for Sundar or Ruth. This has been recent announcement in press about children safety on YouTube. And so I guess I'm just curious to hear for advertisers and parents on the call, what steps have you taken to really make sure that YouTube is safe for kids. And what are the biggest areas you're focused on to make sure it stays that way? Thanks.

So in terms of YouTube growth, just maybe to add a bit more there given your question. I already noted that YouTube revenue growth was strong in the first quarter and again strong here in the second quarter. To clarify, the changes in early 2018 that I referenced on the call last quarter, regarding sites click and CPC growth were not related to policy enforcement actions at YouTube. They had a negligible impact on YouTube revenues. Just to be a really clear. The revenue growth was strong last quarter. And so the click and CPC growth are unrelated to actions on policy enforcement in terms of our ongoing efforts to protect the YouTube ecosystem, we do remain focus and taking the right steps in line with our goals, regardless of impact on the revenues. But an important point is to the removal of content that violates our policies have virtually no impact on YouTube revenues. I just wanted to make sure that was clear. So, consistent growth here. Going into your -- the first part of your question. Where is that growth? Again, I'm going to reiterate what we've talked about on prior calls that we continue to see substantial growth in direct response. So, brand advertising is still the largest part of the business. It's growing at a strong pace. But really I would reiterate what we said previously that we continue to see substantial growth in direct response.

And on your important question about kids' safety, as part of our content responsibility work it's one of the most important areas we focus on. You will see us -- this is why we have put a lot of effort into developing YouTube Kids and it's a product you're going to see us focus more and continue to evolve, add more curated content there, and make sure it's safe for kids and give parents peace of mind. Also ensuring that the content responsibility work applies to family-oriented content on the main YouTube app as well. So, all the work we are doing be it the work we are doing to just remove that content raise up authoritative content higher quality content and reducing the step of harming content all applies everywhere and we're really focused on it. Rewarding trusted creators is a big way we can help -- ensuring greater to produce content which is great for children rewinding them. It's also an important goal for us.

Great. Thanks.

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

All right. Good afternoon everyone. Thanks for taking the question. Maybe that's for Ruth, but Sundar feel free to jump in. The first one here is based on a couple of comments you reminded us in your prepared remarks about YouTube which was the inclusion of Originals and YouTube TV in the Google Preferred inventory. You've given us a little bit of color on direct response growth at YouTube over the last little while. Can we assume that those two additions were a bit of a boost to the brand advertising side of the business as that's more inventory available for that for that sort of high-quality type of brand orientation that TV advertisers are looking for? And then just second coming back to Google Marketing Live notwithstanding your comments Ruth that it take some time for products to be adopted. There are maybe one or two out of those announcements there that you would highlight as being potentially particularly material over the longer term? Thank you.

On the first in terms of YouTube for brand, I would say it's more secular across the platform promoting higher-quality content, our work on brand safety, content, responsibility adds up to it. Also creators just generating better content. I think all have played a part and I would say it's more crosscutting. On the second thing on Gmail in terms of things we were excited about. To me be discovery ads and gallery ads, I mean they're both pushing us towards mobile first visually-rich immersive ad formats, which also offers a really great user experience. So I think I'm excited about changes like that and I think they have the potential. There is advertiser excitement. But as Ruth mentioned it's early days and I think we rollout now, it takes time to play out. But we definitely see excitement there.

Great. Thanks, Sundar.

Thank you. And our next question comes from Mark May from Citi. Your line is now open.

Thank you. Well, first is for Sundar. I think earlier Ruth had mentioned the importance of machine learning for driving growth in the quarter, and I'm sure in many recent quarters. I believe many have a hard time understanding exactly what that means. And I was hoping you might provide a couple of specific examples of how the company is leveraging machine learning recently to help drive growth and improvements for both users and advertisers? And then secondly for Ruth in terms of the sites TAC, I know there are a lot of variables that go in the changes in sites TAC. But when you look at the puts and takes, how do you see that trending over the next year or two? Thanks.

For us, machine learning plays a critical role across both the consumer user experience and part of ads too. Generally using machine learning to simplify things for advertisers and make campaigns easier and give them better insights is where we see a lot of benefit on the ad sites. So, for example, processing complex datasets and giving back sophisticated real-time insights really helps make a difference. And also on the front end for marketers, helping them find the right creator for every moment, helping them manage bidding in real-time. And so every step in the consumer journey, I think machine learning is just making things more efficient, more easier to use and driving productivity for them. So that's what plays out through our systems.

And in terms of the TAC rate. As we've talked about previously, the growth in mobile does put upward pressure in the sites TAC rate and that was the primary driver of the year-on-year increase in the second quarter. And we do expect the underlying trend to continue given the ongoing growth in mobile.

Thanks

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

Thanks. A couple for me as well. First off, as you embrace more commerce and payments on the platform broadly speaking along with the new ad formats you've talked about, can you also talk about what role take rates might play in terms of future initiatives and revenue growth? And then secondly on Assistant and Duplex, in terms of near-term Search innovation, I wonder if you could characterize how important that is in terms of the momentum you're seeing and longer term, how this might impact platform monetization? Thank you.

On the first question, I think it's a good question. There's a lot of discovery that happens across Google's properties and including Search and YouTube. And so anything we can do to make sure users have a better experience when they are interested in transacting will have a big role. So there's a lot more work underway to make sure payments work better. Sign in works better. Payments works better. All of that I think will be -- over the long-term will be drivers, because it improves overall user expense especially for commercial clicks. In terms of Assistant and Duplex, I mean, for us Assistant is where we can clearly see we can really push our goal of being more helpful to users, helping them get things done, including things that matter in the real word. And so, that's what we are focused on. And if we get that right, just like with the Search, there are many things which users want to get done, which do have commercial intent to them. And I think that's the value-creation opportunity as well. But we are focused on making sure the user experience constantly gets better and we are investing to get there.

Thank you.

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

Great. Thank you. Sundar, there's been a lot of regulatory news lately, especially from the DOJ. Just wondering how you think about a more intense regulatory environment. Getting a lot of questions and wondering, if you think about that, really affecting Google operations. And then, Ruth, definitely nice acceleration across the board. Of course, Europe accelerated as well. When you think about GDPR implementation last year and you're lapping that, is that helping Europe at all? Or was there really no impact from GDPR? Thank you.

On the regulatory question, we understand that there will be scrutiny. We are - we will engage constructively. It's not new to us. We have participated in these processes before. Today we do operate under a lot of regulation, be it on privacy, be it on competition, be it on copyright, intellectual property, et cetera. And even in the U.S., we have engaged in the process before to the extent we have to answer questions, we will do so constructively. And to the extent there are concerns, we'll address them as well. But I think, for me, it's important that we stay focused on building helpful products to users and that's the value we ultimately provide our users. And I think that's what we'll stay focused on as a company.

And in terms of GDPR, we did implement late in the second quarter of 2018. We think it's, obviously, a critical area, making sure we get it right. That's at the overall impact of regulation on consumers and businesses, is it still playing out. And we're very focused on making sure we're doing what's best for users and ensuring we're compliant with the law, not based on any potential revenue impact.

Thank you.

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

Hey guys. If I can squeeze two in real quick. Ruth, the Google segment operating profit was up 16%. That's the highest growth rate in about two years. So, I guess, how should we think about the cadence of that relative to your comments about the headcount growth in the Looker acquisition looking forward? And then Sundar, at I/O you mentioned that active Android installed base is now over 2.5 billion. That's up about 10% year-on-year and a lot of that’s coming from emerging markets. So, I guess, just big picture, how do we think about the growth rates that you can sustain in mobile search revenue relative to that 10% active Android growth rate? Thank you.

Yeah. Thanks for that. I tried to enumerate the things as we're looking forward very much to your question. Our overall long-term investment thesis is unchanged. We are very focused on investing to support the ongoing growth we see across Google in particular as we're talking about in Search while we're also investing to build new businesses most notably in Cloud as we've talked a lot about here today. And across all of Alphabet, we do continue to benefit from machine learning that's both OpEx and CapEx. And as we both commented given the opportunities we see with the application of machine learning across the business, we are continuing to invest. Our lens on the pace of investing does have three facets in it. First is investing at the appropriate pace to support long-term earnings growth. And then we were very focused second on optimizing investments within each product area. And finally, as we've talked about investing to support operational excellence. But the mega point is that we are excited about the long-term opportunity and we're continuing to invest which is why in opening comments, I wanted to make sure to call out what we're seeing with respect to ongoing investments and across the business the increases in headcount and the reasons for them at the benefits of those investments as well as sales and marketing and the fact that that is back half loaded and -- back half weighted I should say. And so try to lay out the relevant points for you to ensure that we make it very clear. We are committed to continue to invest for what we see as a long-term opportunities.

And on the mobile question, we are definitely investing in Android with a focus on the next billion users as well as making sure the mobile experience continues to evolve. In terms of the mobile experience, I still think from a user standpoint, there's a lot of information overload. So, being helpful to users and helping them navigate it be it Search, Assistant, Maps, and YouTube I think we are focused on the opportunities there. And in terms of the next billion users there's a lot of headroom there over time and we are focused on. That's why we take efforts like Android Go seriously. We are constantly working hard to lower the barrier so that more people can benefit from being online and participating in the digital economy and so it will continue to be a focus for us.

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

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

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.