Alphabet Inc. (GOOG) Q2 2023 Earnings Call Jul. 25, 2023

Sundar Pichai - Chief Executive Officer

• Google had a solid performance this quarter, driven by Search and YouTube, and strong growth in Cloud.

• The company launched Search Generative Experience (SGE), a generative AI that makes search more natural and intuitive.

• AI models PaLM 2 and Gemini are under development to make Google's products even more helpful.

• Google Cloud continues to grow, with Q2 revenue of $8 billion, up 28%, and an operating profit of $395 million.

• Google's AI-optimized infrastructure is used by thousands of customers and partners, including more than 70% of generative AI startups.

• Google is continuously improving Bard, a conversational AI experiment, which is now available in over 40 languages and has new Google Lens capabilities.

• Duet AI, introduced earlier this year, is helping people collaborate with AI to code, write, and get better insights from data.

• Google is committed to developing and deploying AI technology responsibly and has signed joint commitments with other leading AI companies.

• On YouTube, revenues across all products were nearly $40 billion for the 12 months ending in March, with strong growth in audiences and engagement.

• Pixel sales continue to rise, and Android 14, the latest OS, will incorporate advances in generative AI to personalize Android phones.

• CFO Ruth Porat will become President and Chief Investment Officer, leading the company's 2024 planning and continuing as CFO during the search for her successor.

• Google's reallocated teams are working on high-priority projects, optimizing the company's real estate footprint and slowing hiring and expense growth.

• Google is partnering with ISVs and SaaS providers, such as Box, Salesforce, and Snorkel, and consulting firms like Accenture and Deloitte, to train more than 150,000 people on Google Cloud generative AI.

• New Pixel devices were introduced, including Pixel Fold, Pixel Tablet, and Pixel 7A, with a great response from customers.

• Google is enthusiastic about the pace of innovation and momentum across the Company, with 15 products serving half a billion people each, and six serving over 2 billion each.

Philipp Schindler - Chief Business Officer

• Google Services revenues reached $66 billion, a 5% YoY increase.
  The Google Advertising revenue growth was led by retail, with Search and Other revenues growing 5% YoY.
  YouTube ad revenues rose 4% YoY due to brand and direct response.
  Network revenues declined by 5% YoY, while Google Other revenues saw a 24% YoY increase, led by YouTube subscriptions.

• Key priority areas include Google AI, Retail, and YouTube.
  Approximately 80% of advertisers use at least one AI-powered search ads product, with generative AI supercharging new and existing ads products.

• New AI enhancements were introduced to make campaign construction easier and improve the quality of ads, and a revamped asset creation flow was rolled out in Performance Max.
  Additional updates include new asset insights, search term insights, and customer lifecycle goals.

• Innovations in Retail drove increased online sales, store visits, and in-store sales.
  A new AI-powered virtual try-on tool and product studio were launched, and Merchant Center saw a 2x growth in business use over the past two years.

• YouTube's growth focus is on Shorts, Connected TV, and subscription offerings, all of which saw good growth this quarter.
  The momentum of Shorts remains strong, and Connected TV is driving substantial engagement and ROI for advertisers.

• Advertisers have seen an increase in ROI with YouTube compared to TV and other online video.
  For instance, Hershey's reported a 65% increase in ROI from 2018 to 2023, with YouTube being their top ROI driving media partner.

• A new partnership with Warner Bros. Discovery was announced, focusing on the Android ecosystem, Google TV, and new Surfaces.
  An expanded deal for Max, inclusive of a Max NFL Sunday Ticket bundle on YouTube TV, highlights a commitment to providing high-quality content and experiences.

  Ruth Porat - Chief Financial Officer

• Alphabet's Q2 consolidated revenues were $74.6 billion, marking a 7% YoY increase, mainly attributed to Search and Cloud segments' performance.

• Total cost of revenues was $31.9 billion, up 6%, driven by content acquisition costs (especially for YouTube) and hardware costs associated with Pixel family launches.

• Operating expenses stood at $20.9 billion, up 4%, while operating income was $21.8 billion, a 12% YoY increase.
  Operating margin was 29%.

• Net income was $18.4 billion.
  Free cash flow for Q2 was $21.8 billion, and $71 billion for the trailing 12 months, reflecting improved operating performance and deferral of certain tax payments.

• Alphabet ended the quarter with $118 billion in cash and marketable securities.

• In Google Services, revenues were $66.3 billion, up 5%.
  Google Search and YouTube advertising revenues grew by 5% and 4% respectively.
  Other revenues were up 24%, primarily from YouTube non-advertising revenues and hardware revenues from the Pixel 7a launch.

• Google Cloud revenues were $8 billion, up 28%.
  Revenue growth remained strong across geographies, industries, and products.
  Google Cloud had an operating income of $395 million and an operating margin of 5%.

• Revenues for Other Bets were $285 million, and the operating loss was $813 million.
  The decrease in operating loss was mainly due to a reduction in valuation-based compensation liabilities related to certain Other Bets.

• Looking ahead, Alphabet sees potential in AI-optimized infrastructure, large language models, AI platform services, and generative AI offerings like Duet AI for Google Workspace.

• The company remains focused on reducing its cost base, evident from actions like reducing the pace of headcount growth and optimization of global office space.

• For CapEx in Q2, the largest component was for servers, reflecting increased investments in AI compute.
  Delays in data center construction projects were noted.

• The company anticipates higher levels of investment in technical infrastructure through the second half of 2023 and into 2024, primarily to support AI opportunities across Alphabet.

• Despite higher projected investments, Alphabet remains committed to durably reengineering its cost base to help create capacity for these investments and support long-term, sustainable financial value.

Anne Chapman

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