Alphabet Inc.

ladies and gentlemen, and welcome to the Alphabet First 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. If anyone should require operator assistance, please press star and then zero on your touchtone telephone. 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 first quarter 2019 earnings conference call. With us today are Ruth Peratt and Sundar Pichai. Now I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business performance and operations and our expected level of capital expenditures may be considered forward-looking, and such 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 most recent Form 10-K filed with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website, located at abc.xyz.investor. And now I'll turn the call over to Ruth.

Thank you, Ellen. In the first quarter, total revenues of $36.3 billion were up 17% year-on-year and up 19% in constant currency following a strong 2018. Once again, our results were driven by ongoing strength in mobile search along with important contributions from YouTube followed by cloud. For today's call, 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 will conclude with our outlook. Sundar will then discuss business and product highlights, after which we will take your questions. Let me start with a summary of Alphabet's consolidated financial performance for the quarter. Our total revenues of $36.3 billion reflect a negative currency impact year-over-year of $1.2 billion, or $1 billion after the impact of our hedging program. With respect to alphabet revenues by geography, U.S. revenues were $16.5 billion, up 17% year-over-year. EMEA revenues were $11.8 billion, up 13% year-over-year, and up 16% in constant currency, reflecting weakening of the euro and the British pound. APAC revenues were 6.1 billion, up 27% versus last year, and up 31% in constant currency, reflecting primarily the weakness of the Australian dollar and the Indian rupee. Other Americas revenues were 1.9 billion, up 10% year over year, and up 21% in constant currency, reflecting primarily the weakening of the Brazilian real and Argentine peso. Turning to profitability, in our earnings press release, we provide a table to highlight the impact of the European Commission fine on operating income, net income, and EPS results in the first quarter. I will comment on results both with and without the impact of the fine as I review the results. On a consolidated basis, total cost of revenues, including TAC, which I will discuss in the Google segment results, was $16 billion, up 19% year-on-year. Other cost of revenues on a consolidated basis was $9.2 billion, up 27% year-over-year, primarily driven by Google-related expenses. The biggest contributor was costs associated with our data centers and other operations, including depreciation, followed by content acquisition costs, primarily for YouTube and mostly for our advertising-supported content, but also for our newer subscription businesses, YouTube Premium, and YouTube TV, which have higher CAC as a percentage of revenues. Operating expenses, including the impact of the EC fine, were $13.7 billion. Excluding the impact of the fine, operating expenses were $12 billion, up 20% year over year. The biggest increase was in R&D expenses, with headcount growth in cloud as the largest driver. Growth in sales and marketing expenses primarily reflects additions to headcount. Growth in G&A expenses is primarily due to legal matters, including the effect of a legal settlement gain recorded in the first quarter of 2018. Stock base compensation totaled $2.8 billion. Headcount at the end of the quarter was $103,459, up $4,688 from last quarter. Consistent with prior quarters, the majority of new hires were engineers and product managers. In terms of product areas, the most sizable headcount increases were in cloud for both technical and sales roles. Operating income was $6.6 billion. Excluding the impact of the EC fine, operating income was $8.3 billion, up 9% versus last year for an operating margin of 23%. Other income and expense was $1.5 billion. As I trust most of you are aware, in 2018, this line item was meaningfully elevated because of the introduction of a new accounting standard that requires recognition of unrealized gains and losses on equity securities. We provide more detail on the line items within OINE in our earnings press release. Our effective tax rate was 18.3% for the first quarter, reflecting a sizable impact from the non-deductibility of the EC fine. Net income was $6.7 billion, and earnings per diluted share were $9.50. Excluding the impact of the EC fine, net income was $8.3 billion, and earnings per diluted share were $11.90. Turning now to CapEx and operating cash flow. Cash CapEx for the quarter was $4.6 billion, which I will discuss in the Google segment results. Operating cash flow was $12 billion with free cash flow of $7.4 billion. We ended the quarter with cash and marketable securities of approximately $113 billion. Let me now turn to our segment financial results. Starting with the Google segment, revenues were $36.2 billion, up 17% year-over-year. In terms of the revenue detail, Google Sites revenues were $25.7 billion in the quarter, up 17% year-over-year. In terms of dollar growth, results were led again by mobile search, with a strong contribution from YouTube, followed by desktop search. Network revenues were $5 billion, up 8% year-on-year, continuing to reflect the performance of the primary drivers of growth, AdMob, followed by Google Ad Manager. Other revenues for Google were $5.4 billion, up 25% year-over-year, fueled by cloud and play and partially offset by hardware. Google Cloud Platform remains one of the fastest-growing businesses in Alphabet with strong customer momentum reflected in particular in demand for our compute and data analytics products. Strong growth in play was driven particularly by performance in APAC. Hardware results reflect lower year-on-year sales of Pixel, reflecting in part heavy promotional activity industry-wide given some of the recent pressures in the premium smartphone market. We provide monetization metrics in our earnings press release to give you a sense of the price and volume dynamics of our advertising businesses. Total traffic acquisition costs were $6.9 billion, or 22% of total advertising revenues, and up 9% year-over-year. Total TAC, as a percentage of total advertising revenues, was down year-over-year, reflecting a favorable revenue mix shift from network to sites. as well as a decrease in the network TAC rate. The site's TAC rate was flat year over year as the impact of the ongoing shift to mobile, which carries higher TAC, was offset by the growth in TAC-free sites revenue, primarily from YouTube. In Q1, the network TAC rate declined year on year, primarily due to a favorable product mix shift. Google stock Based compensation totaled $2.6 billion for the quarter, up 13% year-over-year. Operating income was $9.3 billion, up 11% versus last year, and the operating margin was 25.8%. Accrued CapEx for the quarter was $4.5 billion, reflecting investments in data centers, servers, and office facilities. Let me now turn to and talk about other bets. Revenues were $170 million, primarily generated by fiber and Verily. Operating loss was $868 million. Other bets accrued, CapEx, was $59 million. Key recent accomplishments include Waymo recently announced that it will expand its activities in Michigan, opening a facility in Detroit that will be the first factory dedicated to the production of L4 autonomous vehicles. Last week, there were exciting announcements from two additional other bets that were originally incubated within X. Loon announced a long-term strategic relationship to advance the use of high-altitude vehicles to deliver connectivity with SoftBank's telecoms group, HAPS Mobile, which will invest $125 million in Loon. Wing became the first drone delivery company to receive air carrier certification from the FAA an important step toward beginning a commercial service delivering goods from local businesses to homes in the U.S. Let me close with some observations on our priorities and longer-term outlook. As we highlighted on our last call, there was a significant swing year over year in the impact of currency movements on our results this quarter, from a big tailwind in the first quarter of 2018 to a headwind in 2019. These affect both revenues and operating income, given the majority of our expenses are in the U.S. Based on the continued strengthening of the U.S. dollar relative to key currencies, we expect a continued headwind to our revenues and operating income again in the second quarter. In terms of our key revenue drivers, with respect to CITES revenues, as we indicated last quarter, the timing of product changes in ads at times can have an impact on year-on-year growth rates. we will continue to make changes with a focus on the long-term best interest of users and advertisers. We remain confident about the sizable opportunity ahead to improve the advertiser and user experience through our ongoing commitment to product innovation, in particular by leveraging machine learning across our ads, products, and properties, turning to the key drivers of growth in other revenues. We are pleased with the momentum of Google cloud platform with balanced growth of both new customers and expansion within existing customers driving revenue growth. With respect to hardware results, while the first quarter results reflect pressures in the premium smartphone industry, we are pleased with the ongoing momentum for assistant-enabled home devices, particularly the Home Hub and Mini devices, and look forward to our May 7th announcement at I.O. from the hardware team. Turning to profitability. With regard to Google OPEX, the first quarter results once again reflect our ongoing commitment to investing for the long term. You can see that in R&D, where we continue to invest in technical talent for priority areas like cloud, search, and machine learning. In terms of sales and marketing, the pace of investment in Q1 reflected a timing shift in spend, and we expect these expenses to pick up in the second quarter. In other bets op-ex, we are still early in the life of these companies and do plan to continue to invest meaningfully for the long-term opportunity. With respect to CapEx, the year-on-year decline reflects the purchase of a building in New York in the first quarter of 2018. As discussed on our call last quarter, while we anticipate that our full-year CapEx investments will exceed those in 2018, the growth in investments should be at a meaningfully lower rate than in 2018. We continue to expect a sizable investment in both compute requirements to support long-term growth, as well as in office facilities. In conclusion, we feel confident about the opportunities ahead, and we continue to invest thoughtfully for the long term. I will now turn the call over to Sundar.