Ladies and gentlemen, thank you for standing by. And welcome to the Alphabet Third Quarter 2019 Earnings Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I'd now like to hand the conference over to your speaker today, Ellen West, Head of Investor Relations. Please go ahead.

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

Thank you, Ellen, and good afternoon. Q3 was another great quarter at Google with strong revenue growth driven by mobile search, YouTube, and Cloud. We celebrated Google's 21st birthday this quarter. While our mission to organize the world's information and make it universally accessible and useful hasn't changed, we've evolved from a company that helps people find answers to a company that helps you get things done. Since the beginning, we've always invested in tackling deep computer science problems that can have a significant impact on society. The chance to be part of these fundamental engineering challenges is why so many people want to work at Google. In just the last week we have announced two significant advances. First, powered by our long-term investment in AI, we dramatically improved our understanding of the questions people ask Google Search. It's the biggest leap forward for search in the past five years. It’s all possible because of a new type of neural network-based technique for natural language processing called BERT, which recognizes subtle patterns in language and provides more relevant results. Second, we recently announced a major quantum computing milestone. I was extraordinarily proud to visit our team in Santa Barbara. To demonstrate supremacy, Google's 53-qubit quantum machine Sycamore, successfully performed a test computation in just 200 seconds that would have taken the most powerful supercomputers much longer time to accomplish. It's the Hello, World! moment we’ve been waiting for and represents a distinct milestone in our effort to harness the principles of quantum mechanics, to solve computational problems. Turning from quantum to the quarter. Today, I'll talk about the momentum we saw across the business in the last three months. First, Cloud. We saw customer momentum across multiple areas under Thomas’ leadership. In September, we announced a landmark partnership with Mayo Clinic. Using Google Cloud to secure and store data and understand insights at scale, Mayo Clinic will partner with us in many ways. Together, we'll work to transform patient and clinician experiences, identify new methods of diagnosing diseases, conduct clinical research, and find new models for delivering patient care.

Thank you, Sundar. In the third quarter, total revenues of $40.5 billion were up 20% year-on-year and up 22% in constant currency. Once again, our results were driven by ongoing strength in mobile search, YouTube and Cloud. I will begin with the review of 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 conclude with our outlook. Sundar and I will then take your questions. Details of Alphabet’s consolidated revenues by geographic region are available in our earnings press release. Regarding our key expense lines, on a consolidated basis, total cost of revenues, including TAC, which I will discuss in the Google segment, was $17.6 billion, up 23% year-on-year. Other cost of revenues on a consolidated basis was $10.1 billion, up 31% year-over-year, primarily driven by Google-related expenses. The biggest contributor again this quarter 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 their revenues. This line also includes the impact of hardware costs, primarily associated with our mid-tier Pixel 3a smartphones. Operating expenses were $13.8 billion, with headcount growth being the largest driver of year-on-year growth for both R&D and sales and marketing, which is reflected in both compensation and facilities expenses. With respect to R&D, the growth was again driven by the addition of engineering talent, consistent with our focus on product innovation. The increase in G&A year-over-year was primarily due to a $554 million charged from our previously announced legal settlements in France. Stock-based compensation totaled $2.6 billion. Headcount was up 6,450 from the second quarter. And 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 again in cloud for both technical and sales roles. Operating income was $9.2 billion, up 6% year-over-year for an operating margin up 23%. Other income and expense was a loss of $549 million, which primarily reflects the impact of unrealized losses and marketable equity securities. As of September 30, the unrealized equity gain in the combined portfolio of marketable and nonmarketable securities was $5.8 billion. We provide more detail on the line items within OI&E in our earnings press release. Net income was $7.1 billion and earnings per diluted share were $10.12.

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

Thanks for taking the questions. Maybe two, if I can. First, Sundar, big picture question. It feels like the concept of the ambient computing was sort of prevalent at the Made by Google event recently. It started with sort of a bit of a shift in theme, what I could tell at Google I/O earlier this year. Can you just talk about what some of the key investments you want to make to capitalize on that opportunity into long-term? How you think Google and maybe broader Alphabet is positioned to capitalize on that? How it might show up at the product services layer? So, I guess, maybe a three-part question, more of a bigger picture nature.

Thanks, Eric. We are very excited by the vision of ambient computing and evolving that. I think, it's a continuity in the sense that over time computing should be more intuitive to users and computing should adapt to users, not the other way around. And the foundations of all of this is all the work we have done with our computing platforms till date and under successful consumer services and developer platforms we have built. And I think that's the most of the investments there. The phones will continue to be at the center of ambient computing for the future. So, that's another important piece where we are already invested in. I think, as we expand beyond and that's what the Made by Google family is focused on, products in your home with our Nest family of products, and wearables which we do with Wear OS and so on. So, supporting that ecosystem, so whether you're at home or on the go or at work, and making sure it works. Our investments in the AI across the Company, I think, will end up playing a key role, AI and Assistant. I think, they'll be at the center of making sure we can anticipate what users want and serve them better.

And our next question comes from Doug Anmuth from JP Morgan. Your line is now open.

Sundar, you talked about the new neural network techniques talking about the biggest breakthrough in Search in years. Could you just help us understand if that’s impacting kind of the advertising and monetization side of the business yet or how that can play out going forward?

Anytime -- maybe I’ll answer it, as BERT, which is the name of the technique we're using, and we’ve rolled it out in Search now. And obviously, anytime we can better make sense of queries, we can serve users better, our search quality goes up, and people engage and that’s -- engage more. So, it's part of a long run sort of things we've been working on, but this is one of our bigger breakthroughs in terms of helping improve the search experience and search quality. And remember, it will help us in a certain set of queries. There are many queries which we’re already working well, but it helps us capture nuance and help understand human context better. And so, I would just characterize this as a big improvement, which improves search quality and creates that virtuous cycle by which people engage more. Of course, a lot of times, we take the same techniques, and sometimes it makes sense on the app side, and down the line, machine learning techniques. And we'll deploy it there as well.

And our next question comes from Heather Bellini from Goldman Sachs.

I just wanted to follow up on a couple of the comments you made about Cloud, Sundar. I was wondering if you could just give us some color on the size of your GCP backlog. And maybe even if you just talk about the trajectory, and how that's changed over the course of the last year? And then, you mentioned the strength and the uptake of BigQuery, I'm just trying to think through how we should think of the margin, level of a service like this versus the traditional compute offerings where you've seen strength to date. And just wondering, if we start to see some positive mix shifts benefits, as some of these premium products start to start to ramp more aggressively? Thank you.

Thanks, Heather. Overall, I know, we gave some visibility into our cloud business and we'll continue to do that periodically. And the momentum has been great. Obviously, ever since Thomas has come in, he has continued to invest across the board. He’s definitely focused a lot on scaling up our sales partner and operational teams. And, it's playing out well. In this business, it's important for you to be in as many deal situations as possible and get those wins, which accrues over time. And so, we are definitely seeing the momentum. Analytics is a huge area of strength for us. And it's an area, which Thomas has a lot of expertise in as well. And BigQuery is such a strong product, so it's a natural area, we are seeing strength. And my sense is, as we get -- if I look at the TAM, the percentage of TAM for which we were eligible, compared to two years ago to last year to now, that number is shifting aggressively due to either completing our product feature set or be completing some of the certifications we need. And so, I think, there are several strong forward-looking indicators and look forward to sharing more at the right time.

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

Can I just ask you to draw a little bit more out on Google Maps? I know that’s for marketing earlier in the year that that seems like that's now at a stage where it's going to be better integrated into the -- I don't know, the purchase path or whatever, you're making it easier for small businesses to tap into what should be really nicely qualified leads. Just talk about the pace at which that -- the monetization of that or just the ad opportunities will be offered to small businesses? Thank you.

In general, local is an important area for us, and we are continuing to invest in building experience that connects merchants, advertisers and users. Google My Business has been our major effort there. Today millions of businesses are -- reach and engage, both through Search and Maps. Specifically, in GML, we announced that we’ll expand local campaigns. I presume that's what you're talking about. It's still early. And in general, we want to make it easier for advertisers, particularly SMBs to come to Google and be able to reach users across our set of owned and operated properties. So, be it Search, be it YouTube, be it Discover, be it Maps, and that's the way we envision that. But, small and medium business is a big area of focus and maps represents a big, long-term opportunity for us.

And just to add on there, given you referenced back to GML, and I think we talked about this last quarter as well. Our view is that the products that were introduced to GML, this year, like in previous years, they're rolled out in phases, they're adopted over time. And so, we don't view the potential impact from this year's slate differently than the impact from products that were launched at previous events, and so just to kind of keep that in perspective.

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

I wanted to ask another one about new product you guys announced earlier this year at GML. And that was really Google Shopping and moving that across some of the new different properties like YouTube and Image Search and Discover. Can you give us a sense for where you are in that migration, kind of over what timeframe should we be thinking about that? And then, maybe just elaborate a bit on the long-term vision of moving shopping functionality into properties like YouTube and how you think that experience will evolve? Thanks.

In general, I think it’s paid opportunity for us. We see tons of what I would call commercial user journeys across Google. Obviously Search is an important area, Image Search, YouTube, Maps all great surfaces by which I think users come with varying degrees of commercial interest, looking to discover and at times transact as well. So, we’ve started thinking much more holistically about what are those experiences and how can we make it better. That involves helping improve the Discovery experience, but when people are interested in it, being able to make it easier to transact. So, the equivalent of being signed and being able to pay when you want and then of course the fulfillment and logistics. So, we're thinking through the end to end experience across all our surfaces and are investing. But, I see the user interest, and it’s an area that I think we have significant opportunities ahead.

And again, these are still earlier stage and it’s -- we’re excited about the longer term impact. But, just again make it clear we’re just still in the earlier stages of testing.

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

Thanks for taking my questions. I have two. Ruth, I think you mentioned the Desktop Search might have been one of the contributors of growth. Can you just talk to us little bit about what types of products or verticals you’re still seeing growth? I know desktop search really impressive, given how long has this been around. And then, Sundar, with all the exciting changes going on with search become more relevant et cetera. Can you just talk about some of the KPIs that you monitor or what you're seeing when it comes to query volumes, click through rate, overall response time, what are you seeing that sort of gives you confidence that you’ll continue to get more and more relevant results for your users? Thanks.

So, in terms of desktop, I described it as a solid contributor to revenue growth. And what we see is that desktop does remain an important form factor for certain more complex tasks. So, things like planning vacations or assessing insurance options, what we see is users continue to go back to desktop, notwithstanding the growing utility of mobile. And I think one of the things that we’ve been very focused on is that innovations that benefit mobile also enhance the desktop experience for users and advertisers.

And then, in terms of -- obviously, we’ve been -- over time, we've developed very comprehensive metric for measuring and tracking search -- search quality -- to get a sense of such quality and how user satisfaction is through search. But, to give you a sense of -- we continue to take that work deeper, we realize users sometimes do searches through sessions understanding what is their satisfaction across the session, what is their engagement, are they getting at what they are looking for? Those are all some of the deeper work we are undertaking, and also understanding by vertical how we are helping users. There was an earlier question around shopping and commerce. That's an example of the kind of vertical and what can we do to make that experience better. Health is another vertical in which we have a whole Google Health team focused on understanding the in-depth experience that would give better experience overall in search. So, very comprehensive effort and we are constantly looking to do it deeper and broader at the same time.

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

I have two. Sundar, there's clearly a lot of innovation happening at Google. But, I'm wondering how do you think about the increase in scrutiny and oversight possibly impacting your ability to explore new services or new markets over time, and ultimately to remain competitive? And second, Sundar or Ruth, we don't often ask about the display network, but just wondering, given all the concerns around privacy, ad blocking and the like, how do you view this business strategically, as part of the overall ecosystem?

On the first part, we consistently want to work and build products that benefit users and support the ecosystem. And so, our products and services benefit consumers, small and medium businesses, advertisers, and overall, they help reduce prices and expand choice. And so, that's our underlying approach, I think, which is what helps us engage and explain to regulators and we’ll continue to do that. I think, there are also many new areas of opportunities available for us, and in many of these areas we are the new entrant and we create competition. And sometimes the competitive pressures can lead to concerns from others. And so, that's part of what's going on as well. But, the other area is, in addition to developed markets, we are investing deeply in our next billion users. So, markets like APAC continue to be bit long term opportunities for us as well.

And our next question comes from Ross Sandler from Barclays.

Ruth, just, if you rewind the clock a little bit, when we entered this year, you had called out how some product changes may cause year-over-year growth rates to fluctuate from time to time. And we haven't heard that in a couple of quarters. So, as we look out towards like 2020 and beyond, do you feel like a lot of the product queue is in a good place, as far as Search and YouTube are concerned, and that these product changes might be a little bit more subtle going forward, or could we return to having more meaningful impact in the future, just any color there? And then, on the third quarter, the Asia region, the growth rate was solid but a tad lower than the prior trend. So, anything notable to call out on APAC?

So, in terms of the first question, I think, as Sundar and I talked about, we're pleased with the strength of the business that you've seen here again in the third quarter. And as we said, since the IPO, we don't manage the business to maximize quarterly results and we'll always do the right thing for the long term. We're very focused on investing for the long term. And I tried to make it clear in opening comments that as a result, quarterly growth can vary and has varied. And I think to your question, our view is that quarterly growth around the rates you've seen since the beginning of the year, for us underscore the strength and the vibrancy actually in our business. And that's particularly true at our size, in the last 12 months we've generated over $150 billion in total revenues. That's about $25 billion of growth in the last year. And we are continuing to invest in long-term opportunities. But, I would make the point that we do keep a lens to the long-term. In terms of your question about geographies. When we look at the performance on a fixed FX basis around the globe, pleased with the performance again in the third quarter. You aptly point out, year-on-year growth in APAC in the third quarter was a bit lower than the second quarter. That primarily reflected slower growth in the network business, and that was in part due to policy changes. It also reflected the fact that the launch of the Pixel 3a was in the second quarter, which boosted the year-on-year growth rate in the second quarter. But, I think also implicit in your question, at 26% year-on-year growth on a fixed FX basis, running it about now $7 billion in quarterly revenues, we’re really pleased with all what the team is doing and the year-on-year growth rate.

And our next question comes from Dan Salmon from BMO Capital Markets.

Sundar, maybe you could give us a little bit of an update on the Discover feed. That's a new product that we featured in the past that I know a lot of users are getting more use out of. You gave us I think some updates on monthly active users or DA use in the past. Any update there would be great or maybe any additional color on sort of how the total amounts of usage goes on there, that's obviously been featured to users a little bit more. And then, second, maybe just a follow-up for Ruth. Sundar spoke at length about your investments in renewable energy earlier and maybe keeping with the theme of the earnings call, you could help us understand how that is or maybe is not helping drive efficiencies across the country -- across the Company and your operating costs overall? Thanks.

Discover is the product we are very excited about. I think, it completes the other half of Search. Search is, we do our mission for our users and be helpful when they come to us looking for information, Discover is the other half where we are proactively understanding what might be most helpful or relevant to them and getting it to them. And we definitely are focused on product quality and making sure the product is actually helpful to users, and when they engage with it, they find it useful. And it's definitely we are making progress. Our investments and machine learning are helping us well. We are definitely able to better anticipate and give them information proactively. So, over time, I see it as important area for us. And it's done and close. It's part of our search and knowledge efforts. And as we do that, you can imagine, you may have started a query in Search, and it's a session, maybe you're looking to take a trip somewhere, or you're researching a particular topic, we may be able to continue that discussion on the user journey in Discover, and that creates a virtuous cycle. So, these are -- we want to be helpful to users in a way that makes sense for them, more continually, and the combination of Search and Discover helps us do that.

And in terms of your question on sustainability, we're proud of the work that we're doing. We do think that it’s a valuable part of what we do, and we do consider the impact on the business and on the financials. It really cuts across every element of what we do, what we’re doing in our technical infrastructure, the way we’re thinking about our products that Sundar talked about, what we're doing with our facilities, what we're doing with AI. And I think it was about a year ago we talked about how we were applying machine learning to energy efficiency in our data centers, and it did have a net benefit. It helped us reduce energy consumption, not only positive for sustainability but was an efficiency effort. Sundar talked about the fact that we are investing -- recently announced that we are purchasing, making an equal investment in renewable energy, part of our commitment to offset 100% of our electricity use with renewable. And in our view this is catalyzing further investment in renewable. That is going to have a modest short-term increase in cost. But, we think it’s beneficial to catalyzing the overall growth in traditional energy. So, there are puts and takes and that we're proud of the work across everything that we are doing to support sustainability.

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

So, Sundar, I was wondering if you can put the quantum computing investment into some sort of perspective. Compute needs for Google have to be exponentially higher versus when you first launched. So, we’re wondering if this helps you get your arms around that ever-increasing compute need. And further, I think you’ll find that investors are as impatient as you guys are for progress. So, can you talk about what kind of products or services this will help you create that you other couldn’t even think about doing before? Thanks.

I’m incredibly proud of the work that the team did and excited about the advancement in the whole industry. I think, in general, obviously, we’ve relied on advances in computing to be able to do what we do. And when we look ahead, we definitely see being able to drive the pace of change here fastest is an important need for us as well as I think source of competitive advantage. As Moore’s Law effects have diminished, I think, we are looking at variety of approach to make sure we can continue doing what we need to. And in that this is an important tool into arsenal. While quantum will take many years to really start making a difference, we want to be at the cutting edge of driving it. I don’t think over time for sure, cloud itself, we do see a lot of interest from cloud customers, particularly in cutting-edge verticals about quantum computing. And so, that's an area where I think we’ll participate in as a business, and more importantly applying it across other verticals we are in, be it health, as an example, I think we will be where we will deliver value in the long run.

And as much as we're extremely excited about the long-term implications for quantum computing, part of your question there about our near term computing requirements. Given our outlook in particular across Google, we do expect to see ongoing demand for compute investments to support our growth, particularly for machine learning, Cloud, Search and YouTube. And the primary driver of the CapEx does continue to be our expectations for compute requirements, so investments in technical infrastructure, as we've talked about today.

And our next question comes from Brent Thill from Jefferies. Your line is now open.

Thanks. I need a Google headset. Sundar, just on investments in GCP, you're in a really unique situation, having built infrastructure and productivity applications. Can you just walk through how you prioritize the two big buckets? There's a lot of different ways you can go in GCP. And just want to follow up with Ruth. You alluded to some G Suite pricing changes. And I know there were some prices that were changed earlier in the year. And I was just curious if you were referring to that price change or earlier in the year or if there was something new?

I mean, you're right. I mean, these are two big buckets and we treat them that way. Obviously, we've talked a lot about GCP, but G Suite continues to be very differentiated. And, we just announced a new leader Javier Soltero coming in with lots of experience to turbo-charge this area as well. And in general, there are many G Suite customers now with who we are having GCP conversations and vice versa. So, I think in general, given we have a big go-to-market effort, the breadth you have allows us to have more conversations and engage through many different paths into the organization. So, it's very synergistic as well.

And in terms of the G Suite pricing, I was referencing the pricing that we announced back in April. It's all outlined in a blog post. Our view was, it was the right time to increase prices, given the ongoing functionality and tools that are included within G Suite. And as I said, what we're seeing here is in addition to the benefit from the price change. We also continue to have nice seat growth.

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

I think I’ll ask on YouTube, could you talk a little bit about your high level OTT viewing strategy? Obviously, subscriptions are growing. Maybe give us an update on how your YouTube subscription product is doing versus expectations? And then, on the paid click growth, it decelerated 18%, anything to call out there, especially related to YouTube, any change to coverage going on or anything we should know about? Thank you.

Subscription is an area we are different definitely excited about. We are pleased with our options so far across both, YouTube Music and YouTube Premium. They're now available in 71 countries from five markets at the start of 2018. So, we are definitely scaling that up and we're seeing great traction. YouTube TV is also doing well. I think, we just announced that PBS is coming to YouTube TV in July. Last month, we announced YouTube TV is now launching on select Amazon Fire TV devices. So, there's definite -- the user satisfaction on the product is high. And so, we are focused on continuing our expansion, building out a great service and building awareness for the service. So, overall, I think, engaging users with premium offerings on YouTube is the focus for us. And the efforts, while early, are definitely showing strong traction.

And then, you asked about click growth and the trend there, the biggest driver affecting the click trends continues to be the growth of YouTube engagement ads. As in the first and second quarter, the rate of YouTube click growth decelerated in the third quarter. That does continue to reflect the changes that we made in early 2018 to really improve the user and advertiser experience. And as we've talked about on prior calls, that did have an impact on click growth. But as we also talked about, they weren't related to those changes in 2018. We're not related to policy enforcement actions that YouTube, they had a negligible impact on YouTube revenues. So, not a read through.

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

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.