woman: good day,ladies and gentlemen, and welcome to the alphabet q22016 earnings conference call. at this time, all participantsare in a listen-only mode. later, we will conducta question-and-answer session, and instructions will followat that time.
Suntrust Small Business Online Cash Manager, if anyone should requireoperator assistance, please press star then zeroon your touch tone telephone. as a reminder,today's conference call is being recorded.
i would now like to turnthe conference over to ellen west,head of investor relations. please go ahead. west: thank you. good afternoon, everyone,and welcome to alphabet's second quarter 2016earnings conference call. with us today are ruth poratand sundar pichai. while you've been waitingfor the call to start, you've been listening to aurora,
an incredible new artistfrom norway who is finding a rapidly growingaudience on youtube all over the world. now i'll quickly coverthe safe harbor. some of the statementsthat we make today may be consideredforward-looking, including statements regardingour future investments, our long-term growthand innovation, the expected performanceof our businesses,
and our expected levelof capital expenditures. these statements involve a number of risksand uncertainties that could cause actual resultsto differ materially. for more information,please refer to the risk factors discussed in our form 10kfor 2015 filed with the sec. any forward-looking statementsthat we make are based on assumptionsas of today, and we undertake no obligationto update them.
during this call,we will present both gaap and non-gaapfinancial measures. a reconciliation of gaapto non-gaap measures is included in today'searnings press release. as you know, we distributeour earnings release through our investor relationswebsite located at abc.xyz/investor. this call is also being webcastfrom our ir website, where a replay of the callwill be available later today.
and now i'll turn the callover to ruth. porat: thanks, ellen. our revenue of $21.5 billionin the second quarter underscoresthe great performance of our businesses globally. for the quarter,our consolidated revenue grew 25% in constant currencyversus last year. once again, the primary driver was the increased useof mobile search by consumers,
benefitting fromour ongoing efforts to enhance the mobile searchexperience. we also benefittedfrom solid growth in desktop and tablet search, as well as continued strengthin youtube and programmatic advertising. i'm going to present to youin the following order. first, review the quarteron a consolidated basis for alphabet.
second, review the results for each of googleand other bets. finally, i will concludewith our outlook. sundar will then review ourbusiness and product highlights for the quarter, after which we willtake your questions. beginning with a summary of alphabet's consolidatedfinancial performance. total revenue was $21.5 billion,
up 21% year over year,and up 6% sequentially. we realized a negativecurrency impact on our revenues year over yearof $113 million, or $35 million after the benefitof our hedging program. holding currency constantto prior periods, our total revenue grew 25%year over year and increased 5% sequentially. once again, alphabet revenuesby geography highlight both the strength of ourbusiness around the globe
as well as the impactthat currency headwinds continue to have on our non-u.s.business relative to last year. u.s. revenue was up 25%year over year to $10 billion. u.k. revenue was up 14%year over year to $1.9 billion. in fixed fx terms, the u.k.grew 20% year over year. these results do not reflect themovement in the british pound subsequent to the resultsof the referendum on june 23. rest of world revenuewas up 19% versus last year to $9.6 billion.
in fixed fx terms, revenues were up 26%year over year. gaap, other cost of revenueswere $4.2 billion. non-gaap, other cost of revenueswas $3.9 billion, up 28% year over year, primarily drivenby google-related expenses, specifically costs associatedwith operating our data centers, including depreciation; content acquisition costs,primarily for youtube;
and hardware costs. gaap operating expenses were$7.4 billion in the quarter. non-gaap operating expenseswere $6.2 billion, or 29% of revenue, up 15% year over year,and up 2% versus q1. the year over year growth was primarily drivenby r&d expense, mainly dueto compensation expense related to headcount growth.
on a gaap basis,operating income was $6 billion, up 24% versus last year. the operating margin was 28%. non-gaap operating incomewas $7.5 billion, up 25% versus last year. the operating margin was 35%. stock-based compensationtotaled $1.5 billion, up 33% year over year,and up 1% sequentially, primarily reflectingincreased headcount
and the impact of our seniorexecutive equity refresh that occurs every two years. headcount at the endof the quarter was 66,575, up 2,460 from last quarter. the vast majority of new hires continued to be engineersand product managers to support growthin priority areas, such as cloud and apps. on a numbers basis,
we are adding more headcountin google, while on a percentage business, we are growing fasterin other bets. other income and expensewas $151 million. as discussed on prior calls, oi&e consistsof a number of line items impacted by market factors, which makes itinherently unpredictable. we provide more detailon these line items
in our earnings press release. our effective tax rate was 20%. net income was $4.9 billionon a gaap basis and $5.9 billionon a non-gaap basis. earnings per diluted sharewere $7 on a gaap basis and $8.42 on a non-gaap basis. turning now to cap exand operating cash flow. cap ex for the quarterwas $2.1 billion, the substantial majorityof which
supported the google segment. operating cash flowwas $9.1 billion, with free cash flowof $7 billion. we ended the quarter with cashand marketable securities of $78.5 billion, of which approximately$48 billion, or 61%, is held overseas. this performance reflectsour strong operating cash flow, offset by the impactof our share repurchases
during the quarterof approximately $1.6 billion, completing the authorization under ourshare repurchase program. let me now turn to our segmentfinancial results, starting withthe google segment. revenue was $21.3 billion,up 21% year over year, which includes the impact of fx. in terms of the revenue detail, google sites' revenue was$15.4 billion in the quarter,
up 24% year over year,and up 7% sequentially. year on year growth reflectssubstantial strength in mobile search, due to the ongoing benefit from the improvementin ad formats and delivery that we launched inthe third quarter of last year. we continue to have solid growthfrom desktop and tablet search. youtube revenuecontinues to grow at a very significant rate,
driven primarily by videoadvertising across trueview and, increasingly,google preferred, with a growing contributionfrom buying on doubleclick bid manager. network revenuewas $3.7 billion, up 3% year on year,and up 1% sequentially, continuing to reflect the stronggrowth of programmatic offset by the traditionalnetwork businesses. other revenue for googlewas $2.2 billion,
up 33% year over year,and up 5% sequentially. year over year growthwas driven by cloud and apps, as well as play,followed by hardware. finally, we continue to providemonetization metrics to give you a senseof the price and volume dynamics of our advertising businesses. you can find the detailsin our earnings press release. let me remind youthat these metrics are, of course, affectedby currency movements.
total traffic acquisition costswere $4 billion, or 21% of totaladvertising revenue, up 18% year over year,and up 5% sequentially. total tac as a percentageof total advertising revenues was down slightlyas a result of a mix-shift between sites revenue,which carries lower tac, and network revenue. the increase in both sites tacas a percentage of sites revenue as well as network tac asa percentage of network revenue
reflects the factthat our strongest growth areas, namely mobile searchand programmatic, carry higher tac. operating income, excluding sbc,was $8.5 billion, up 26% versus last year,for an operating margin of 39%. google stock-based compensation totaled $1.3 billionfor the quarter, up 33% year over year. operating incomereflecting the impact of sbc,
was $7 billion,up 25% versus last year, and the operating marginwas 33%. reflecting investmentsin production equipment, facilities,and data center construction. turning toother bets financials. let me again emphasize that the majority of theseefforts are pre-revenue. we continue to investacross these opportunities, and are doing soin a disciplined way.
we think it remainsmost instructive to look at them overa longer-time horizon, because, as you have seen, quarterly revenuesand expenses can be lumpy for three primary reasons. first, they are early-stage. second, they representan aggregation of businesses operating indifferent industries. and third, they may be impactedby one-time items,
like partnership deals. for the second quarter,other bets revenue was $185 million. reported revenue for other bets was primarily generatedby nest, fiber, and verily. operating loss, excluding sbc, was $709 millionin the second quarter. including the impact of sbc,operating loss was $859 million. other bets cap exwas $280 million in q2,
primarily reflectingongoing investment in our fiber business. i'd like to closewith a few observations on our key themes. first, regarding revenue. our alphabet structure,announced nearly a year ago, gives us a frameworkfor developing new sources of revenue growth within both googleand in other bets
in a disciplined way. you've seenover the past few quarters how our focus on innovationcan drive strong revenue growth. we're continually workingto enhance the search experience and making changes to our adsformats and tools, guided by substantialuser testing. we have repeatedly highlightedthe 3q15 change in format, given the meaningful step-upit drove in our revenue growth rate.
that benefit is evidentagain in the second quarter. as we have always said, we have beenand remain committed to long-term revenue growththrough innovation, but the timing and scaleof the impact of innovation is inherently difficultto predict. second, as to expenses. i've commented many times that our focuson long-term revenue growth
does not give us a passon managing expenses. we invest a lot of timeand effort in assessing how to managefor revenue growth with the utmost respectfor the resources deployed and a focus on getting the bestreturn on those resources, recognizing that,in some areas, secular trends are creatingmargin headwinds. as i mentioned last quarter, there are a number of factorsdriving higher tac
in both our sitesand network businesses. for sites tac,there are a number of factors that contributeto fluctuations-- in particular,changes in the relative use of mobile, desktop,and tablet devices. for each of these devices,sites tac also reflects an interrelated set of factors, including the mix of paid versusorganic distribution points, partners,and agreement terms.
over the past year,the shift to mobile has been the primarily driverof the increase in sites tac, because more mobile searchesare subject to tac. when looking at sites tacas a percentage of revenue, it's important also to remember that while youtubeadvertising revenue is reflected in our sites line, the associated contentacquisition costs are included in othercost of revenues, not tac.
in addition, sites revenueincludes hedging gains with no associated effecton tac. the growth in network tacis due to the ongoing adoption of programmatic platformsby advertisers, which are subjectto a higher tac rate. in operating expenses, people are our biggest areaof investment. we continue to attract,develop, and retain the best peopleto drive our businesses forward.
as you would expect,headcount additions primarily alignwith our priority areas, such as cloud and appsand machine learning. two important pointsregarding the third quarter. first, you will seethe impact in the third quarter of our annual equity refreshfor our employees. as you have seen in prior years, the annual refresh resultsin a sequential step up is sbc. second, headcount growth tendsto be seasonally high in q3,
because that is whenwe bring on new graduates. in addition, please keep in mindthat our marketing costs are typicallyweighted more heavily toward the back half of the yeardue to the holiday season. third, regarding cap ex. at google,the team has been able to drive meaningful efficienciesin planning and operations for our technicalinfrastructure, which has enabled usto support growing demand
at a stable investment level. these efficienciesinclude improvements in power and server utilization,the use of machine learning, and deployment of innovationslike our tensor processing unit. with regard to cap exinvestments for other bets, our fiber investmentcontinues to be the driver. fourth, about our balance sheet. we remain focused on optimizingour capital structure, recognizing the strategic valueof our balance sheet.
we completed alphabet's$1.7 billion debt exchange in the second quarter, which gives us flexibility, including the abilityto use debt financing if appropriate. in light of the interest rateenvironment, we may opportunisticallyaccess the market to term outour commercial paper. in conclusion,in the second quarter,
we deliveredvery strong revenue growth and improvedoperating efficiency. these results reflectthe tremendous talent and hard work of our teamsaround the globe. i will now turn the callover to sundar. pichai: thanks, ruth. as you heard, we had a verystrong second quarter. there's an amazing energyright now at google. the strength of the quarteris about mobile.
it's transformed the waythat people consume information, and google's productshave been a central and much-loved partof that experience. our investment mobilenow underlines everything that we do today, from search and youtubeto android and advertising. mobile is the enginethat drives our present. and now,through our deep investments in machine learning and ai,
we are building the enginethat'll drive our future. since the last earnings call, we had google i/o,our biggest event of the year, and i also wroteour annual founders' letter. both of these allowed meto reflect on our past and look to our future. we are at a pivotaland transformational moment. thanks to advancementsin machine learning, we have the unique opportunityto take a big step forward
for the next ten years. in the letter,i wrote about how we think of our investmentsand our mission. today, i'll walk throughthe six sections of the founders' letter and discuss our progressin each area, and then i'll call out threekey highlights from the quarter that are drivingour advertising business today and into the future.
the first thing i highlightedin the founders' letter was information. at google's core,we remain focused on making informationand knowledge available for everyone. this, of course,starts with search, where we now have trillionsof searches every year. we continue to invest in makingsearch smarter and more useful. in the u.s., we recentlyintroduced a voter tool,
so when you searchfor, "register to vote," you'll get a detailedstate-by-state guide with informationon how to register, requirements, and deadlines. our new keyboard for ioscalled gboard is off to a great start. people love the ability to easily searchright from the keyboard, swipe to type,and quickly send emojis.
and after just one year, google photos is now helpingover 200 million people every month organize and searchtheir photos and memories. at i/o, i was excited to share our visionaround the google assistant. we want to help peopleget things done in a conversational wayacross devices and contexts. this is possible thanks toadvances in machine learning, voice and image recognition,and natural language processing,
which we have invested infor years. you'll be able to experiencethe google assistant in products like our newmessaging app allo and our voice-activated devicegoogle home. and we can't wait to show you what else we are working onin this area. second, machine learning. as i said, machine learningis the engine that'll drive our future,
and it's already makingour products better and helping users every day. in fact, more than 100 teams are currently usingmachine learning at google, from street view to gmailto voice search and more. for example, in search, we use a ranking signalcalled rankbrain which relies on deep learningto improve results. it's already enhancingthe search experience
in 40 languages. and based on user testing, rankbrain can accurately guesswhich results users will favor with about 80% accuracy. advances like this help usmake our search results even more relevant. machine learning is also creating in impactin other ways. just last week,we announced a test
that applied deepmind'smachine learning to our own google data centers, resulting inup to a 40% reduction in the energywe use for cooling. this will greatlyimprove efficiency. and when we publishour research, we hope it'll enable othersto reduce emissions too. third, content. a big part of makinginformation available
is making great contentaccessible, such as google play, youtube,and the web. our efforts to make the mobileweb better for everyone with accelerated mobile pages,or amp, has seen phenomenalglobal momentum. we now have over 150 millionamp pages in our index, and with over 4 millionnew ones published every week from nearly 200 countries. last week, we announcedamp for ads,
which helps advertisers buildfast, simple, and beautiful ads on landing pages. this will help makethe mobile web experience much faster for everyone and help fund itmore sustainably. video is a huge componentof digital content, and youtube continues to shine. it's a thriving homefor creators, with more than 1,000 creators
crossing the 1,000 subscribersmark every single day. our content id systemhas now paid out over $2 billion to partnerswho use the system. a big part of video, of course,is live, which we have invested insince 2011. youtube is the first majorplatform that supports live content in 360 degrees, and we recently announcedthe ability for creators to go live from their phoneswith the touch of a button.
earlier in the quarter,we teamed up with bt to livestreamthe champions league and europa league finalson youtube in the u.k. this special event was u.k.'sbiggest ever livestream. all these innovationsare a big reason why partner revenuehas averaged 50% growth over the last three years. fourth, platforms. a key focus is buildinggreat computing platforms
like chrome, android, and our new virtual realityplatform daydream, so that people can havewonderful experiences, regardless of the deviceor screen they are using. platforms are what make newcomputing experiences possible and also power breakout hitslike pokã©mon go, which i suspect a few of youare playing right now. android is thriving. in the last year alone,
we have deliveredover 65 billion app installs and are helping developersreach an audience of over 1 billion usersevery single month. our partners are also seeingincredible success with flagship deviceslike the samsung galaxy s7. it's a hit with consumersand a shining example of how to build a greatexperience on android. our latest version of android,called nougat, focuses on performance,productivity, and security,
and it also has a vr modebuilt in to help developers create immersivesmartphone vr experiences. speaking of vr, we are already workingwith leading android partners to build outthe daydream ecosystem. so stay tuned for moredaydream-ready phones, controllers, and headsetscoming this fall. fifth, cloud. many tremendousdigital experiences
are being builtin the cloud today, and business are workingto take advantage of the cloud as part ofthe digital transformation. we've been integratingour cloud and apps products to create more unified solutionsfor companies large and small, and these effortsare paying off. we have strong momentumwith businesses like symphony, a secure communicationand workflow platform who recently announced thatits cloud computing business
is available onthe google cloud platform. we provide the high reliabilityand performance needed by symphony's customers in the financialservices industry. our data analytics productbigquery helps mobilegaming company kabam store and understand playeractions within their games, from monetization and fraud to production bugsand level completion statistics.
as i've said, machine learninghas been a major focus and a key differentiatorfor google, and that's true for ourgoogle cloud customers as well. this quarter, we introducedtensor processing units, or tpus, which can deliveran order of magnitude better optimized performanceper watt for machine learning projects. google deepmind's alphagowas powered by tpus,
enabling it to process faster and look farther aheadbetween moves. we are now passing this benefiton to our enterprise customers to supercharge theirmachine learning applications. just last week, we introduced two cloud machine learning apisfor speech and natural language to help our enterprise customersconvert audio to text and easily understandthe structure and sentiment of the text in a varietyof languages.
we also introduceda new undersea cable system, the highest-capacity systemever built, which brings added capacityand performance to support our enterprisecustomers around the globe. this system has 60 terabytesper second of total capacity, more than any activeundersea cable, and is 10 million times fasterthan your cable modem. this is especially excitingas we prepare to launch a new google cloud platformeast asia region
in tokyo later this year. in addition to building the bestproducts and infrastructure, we are also hard at workbuilding the best team to serve every aspectof our customers' businesses. we now have key leadershipin place and centralized teams supportingcustomer-facing activities, including sales, marketing,global alliances, industry solutions,and professional services. we our building out our supportat full scale
as more and more fortune 100companies choose our cloud. sixth, building for everyone. since the internetis one of the world's most powerful equalizers, we are committedto building technology and making information availablefor everyone, wherever they are. this has always been codeto google's dna. as we have shared before,
we are workingwith indian railways and railtel to bring high-speedwireless access to the entire internet to millions of peoplewho travel throughout india'stop railway stations. there are already 2 millionpeople logging in every month, and they are using as muchas 15 times the data they would otherwise usein a full day on their cellular networks.
we are also working hardto ensure that our products work wellfor everyone, regardless of where they live. we've been expanding directcarrier billing in google play with more than 100 partnersin 40 countries. to give you a senseof the impact, in indonesia alone, we have seengrowth in monthly buyers quadruple in the last 18 months. switching gearsfrom these six areas,
it's our business successthat enables us and our partners to grow and invest further. we extraordinarilywell positioned to take advantageof the mobile shift, and we are already seeingstrong growth in three key areasof our advertising business-- mobile search, video,and programmatic. all of the momentumyou're seeing is because our productsare doing well in mobile
and our customers are gettinggreat results from them. we offer advertisersand agencies the best ways to reach customersat the right moment of intent, the best reach in inventory,the best mobile formats, and the leadingmeasurement solutions. and, of course,we do all of this while making sure we arecreating a great ads experience for users that's helpfuland unobtrusive. we know that peopleare constantly searching
for thingswith commercial intent and are used to swipingand tapping. our data shows that peoplerespond really well to that. we show they are fresh,fast, and useful. so let me turn to threekey moments from the quarter for our advertising business. number one,our google performance summit for direct response marketers. we announced new expandedtext ads
and bid adjustmentsby device type, which are rolling out this week, as well as new local search adsin google maps. thanks to the risein mobile phones, the line between onlineand offline experiences continues to blur. this creates even greateropportunity for businesses to use google mapsto help bring customers into their physicalstore locations.
thanks to strongintent signals, particularly on mobile, google continues to offergreat opportunities for direct response marketersto reach potential customers, whether they are visitingyour website, calling your business, walking into your store, or downloading your app. for instance, walgreenspartnered closely with google
to promote their appacross search, google play, and our display networks. in one month, they increasedthe number of app downloads 87% from the previous month. number two, our annualbrandcast event for brand advertiserswas a huge success. we announced breakout videos,. the ability to advertise againstfast-rising videos on youtube, as well as a deal with the nba
to bring their inventoryto google preferred. at this point,the volume of google preferred bought this year is alreadymore than double what it was at the same timelast year. fast food chain wendy'sused google preferred to extend the reachof their tv ads. and thanks to our brand liftmeasurement solution, they were able to seethat one of their campaigns drove an incredible 65% liftin ad recall
and 146% lift in google searchesfor the wendy's brand. we are hearing a lotof the same feedback from many top brands who continue to investmore and more of their budgets on youtube. and number three, ourdoubleclick leadership summit held just last weekfor ad technology partners. we launched the ability to buynative ads programmatically across all screensin doubleclick bid manager.
since they're providing fullydesigned creatives for each publisher, advertisers can simply uploadthe components of the ad, like headline, image, and text, and doubleclick automaticallyassembles them to fit the context and formatof the site or app where they appear. making native advertisingsimple at this scale will help to make ads faster,better, and less intrusive,
while driving great returnsfor publishers. so there's my top three moments from our advertising businessthis quarter. as you can see,it's been extremely busy. more generally, from advertisingto cloud to digital content to hardwareand to so much more, we have tremendouslong-term growth opportunities at google. today's great innovations
are being drivenby investments in mobile. tomorrow's will be drivenfrom our investments in machine learning and newcomputing platforms. but one thing is constant. we'll continue to focuson building the best experiences for billions of peoplearound the world. i want to thank all the googlersaround the world who help us create theseopportunities every day and help them bring to lifefor our users and partners.
with that, i'll turn itback over to ruth. porat: thank you, sundar. we will now takeyour questions. woman: ladies and gentlemenon the phone lines, if you would liketo ask a question at this time, please press star followed bythe number one key on your touch tone telephone. if your questionhas been answered or you wish to remove yourselffrom the queue,
you may press the pound key. and our first questioncomes from carlos kirjner at bernstein. your line is now open. kirjner: thank you,i have two questions. first is about search revenues. search is probablya $50 billion business, and from today's results, it's clearly stillgrowing strongly.
of course, as the businessgets larger, it becomes harder and harderto sustain growth. as you look at this increasinggrowth challenge and your product innovationin search, including the recent changesand also those that you have in your roadmapfor the next few years, how do you think about yourability to sustain such revenues, growth, and the trajectory over whichthey will ultimately decelerate?
the second questionis on google fiber. i think ruthhas been quite clear that we should expect anincrease on other bets cap ex, and the fiberis the main driver, suggesting more investment. yet, when we see the rateat which you have deployed in markets like austinor some of the newer markets, they are quite slow. you also have started to talkabout wireless technology,
suggesting that you haven'tfully figured this out yet, which, in turn, suggests thatit's gonna be slow deployment. so the question is,which one is it? is it faster,more aggressive deployment, given the cap ex commentary? or is it gonna be continuedslow, multi-year deployment, as your track record on the talkof new technology suggests? thank you. porat: thank you, carlos,a lot in those questions.
so, starting with sites revenue and where we seethe opportunities there, obviously sites revenueup 24% year on year, includes the currency impact. and as sundar and iboth commented on, the biggest driver again thisquarter was mobile search. we do continue to havesolid growth in desktop, tablet,and we have strength in youtube, particularly video advertising,both in our trueview products
and increasinglyfrom google preferred. as we've talked aboutevery quarter since the third quarterof last year, we have benefittedfrom the change to ad formats on mobile that we made in thethird quarter of last year, and that is evidentyet again this quarter. you know, and then,as per your question, going back to that third quarterof '15, when we made the changein ad formats on mobile,
our growth ratemeaningfully accelerated. and as we've notedin each subsequent quarter, that change has beenthe primary driver of the higher year on yearrevenue growth rate. but, importantly, as you've seenover the last several quarters, we're benefitting not justfrom the higher growth rate, but also from the durabilityof the impact of the change. so that's really underscoring the efficacyof these ads for users,
as per sundar's comments. and it's reflected in revenuesrunning at a higher level. and you can see wherethe revenue growth rate was prior to the third quarterintroduction. i'll let you doyour own forecasting. but when comparing growth rates, we're obviously at a higherrevenue base versus last year. and then, sundar talked about some of the recent eventsthat we've had.
you know, innovation is coreto everything we're doing. we've launched several changesto ad formats and tools just a few days ago. as the team discussed at thegoogle performance summit, we believe the changesshould result in a better, more usefulexperience for users and better performancefor advertisers. and so, you know, that justcontinues to be core to the way we're lookingat the business
with a lotof incremental opportunity. and then, on your fiberand the cap ex question, you know, look, we continueto see fiber as a huge market opportunity. we're focused on creatingabundant connectivity on networks that are always fastand always open, as we've talked about. and we're continuing to workclosely with cities, given their excitement.
we're also continuingto push the frontier with tech innovation,as you noted in your question, and different execution paths. so, as you said in the question, we're exploringboth fiber and wireless, and you may have seen our recentacquisition of webpass. so we want to make surewe're executing against a very largeand attractive market in the most effectivean efficient manner.
we did start adding customersin charlotte in july. and so, again, we view itas a big opportunity. we're being thoughtfuland deliberate in our execution path. woman: thank you. and our next question comes from eric sheridan of ubs. sheridan: thank you so muchfor taking the questions. i may be following upon carlos' question on search,
and, ruth, your answer. wanted to go a little deeperon the retail and the travel verticals. it's two areas where we seea lot of innovation from the company right now, both on the product sidethat consumers are seeing, as well as onthe advertising side. how should we think aboutthe roadmap ahead for both increaseduser engagement
with your productin those key verticals, as well as the abilityfor advertiser conversion to lead to more advertisingbudgets for the company over the medium-to-long-term. and then, maybe one secondquestion would be, with the buy-back authorization having been completedthis quarter, ruth, would loveto get your thoughts on how you're thinking aboutthe balance sheet as an asset,
and how shareholders shouldsort of think about the ability for shareholder returnsover the medium- and long-term. thank you so much. porat: okay, so why don't istart on your second question, then i'll pass it to sundaron the first question. so, as you know, we announced the share repurchase programrelatively recently. it was just in the third quarterof last year. and we just completed it,as per my opening comments.
as we discussedback in the third quarter, we do always review our balancesheet and capital requirements and opportunitieswith our board. and i'm not gonna speculateabout a potential for a future board decision, so really nothing moreto add at this point. and then sundar? pichai: look, we obviously thinkgenerally across all types of verticals,
and you highlight a coupleof important verticals. to give an example on travel, many users start their travelinquiry on google, and so we focus on doinga better job of getting them, you know,deeper information, destinations, and compare coststhrough new features in hotel search,google flights, and the recently launcheddestinations on google. in all of this, we work closelywith many different partners,
including onlinetravel agencies, and so we focuson product enhancements in partnership with them. and the better job we doat answering user queries, the more qualified leadswe can provide to our partners. and we think it'sa win-win arrangement. and the same concept applies tothese other verticals as well. so, you know, we approach itvery holistically. and our next question comesfrom heather bellini
of goldman sachs. bellini: thank you very much. sundar, i was wondering, i know you gave us some coloron the cloud business just a few moments agoin your prepared remarks, but i was wondering if youcould share with us some of the changes,if you could highlight some of them that diane has madesince she's come on board, and i'm wonderinghow some of those changes
might be startingto impact conversations with potential customersthat you're having. and in particular,just trying to get a sense of, are you seeing google now,with gcp, getting invited to more rfps and starting to seeyour win rates go up as a resultof some of her initiatives? pichai: thanks, heather. absolutely, you know,i think diane
has initiated a set of changes, and essentially,she has integrated our go-to-market strategy with our engineeringand product efforts. she has integrated ourengineering efforts on the cloud. so, for example, google apps, drive, docs, gmail, slidesheets, hangouts, et cetera, is on top of the cloud stack.
our enterprise customersand partners, you know, for them, now,they have one enterprise face. and internally,from frictionless contracts to touch points across google, to one person to work with themon our considerable enterprise technologiesand product. so the big unifying onebeing cloud. we now have new leadershipin place across sales, professional services,marketing, and partnering,
plus new customer-facing support in the form ofprofessional services. we have an office of the ctoand customer reliability. so, you know,it's a big set of changes, and it's obviouslyhaving an impact. many of our customersare also partners, and so, it's increasingly clearhow much we can do together. so, you know, for me,i see a shift to a world-classenterprise approach,
and it's definitelyhaving an impact on the type of conversationswe are having and the outcome of the rfpswe are engaged in. woman: thank you very much. woman: thank you,and our next question comes from ross sandlerof village bank. sandler: great. sundar, i just had a questionabout machine learning. so you spent a lot of timetalking about
how this is positively impactinggoogle as a whole, and how you're buildingfor the future both tonight and at i/oa few months ago. and you guyshave mentioned things like reducing the error ratesin search and improving relevancy. but are there tangible examplesof either engagement or volume also increasingas you roll out machine learning in search and then youtubethat you could share?
and then, i think googlerecently introduced smart bidding in adwordsusing machine learning. so do you seesomething like this as a potential revenue driver? any color, that would be great,thank you. pichai: so, we definitely-- a core part of improvingthe user experience for the next many years will bedriven by machine learning. to give a specific example,you asked about youtube.
you know, youtube watch timeis something we focus on. we use machine learningincreasingly to give recommendationsto users of, when they're watching a video, in terms of what theycould watch next. and that recommendation system is increasinglyusing machine learning. and that directlydrives engagement. so there are severalsuch examples
i can give across the company. you mention adwords too. and if you look at adwords and, you know, thoughtfulchanges we do over time, you're dealing with a bigcommunity of space in terms of the kinds of changes and interactionsthat can happen. so deploying machine learningthere over time, you know, over many years,
i think, is a more powerfuland deeper way to explore the variouspossibilities that exist, and i think will leadto long-term impacts. and so i'm veryoptimistic on it. woman: thank you, and our nextquestion comes from douglas anmuth of jp morgan. man: thanks for takingthe questions. i wanted to ask two. first, sundar, you talkedabout expanded tech stats,
and my question is just,you know, as the numberof characters here increases, some would say up to 50%through expanded tech stats, you're taking up more spaceon the page. how do you balance the higherpercentage of clicks from these pay dads withthe natural search experience? and then, secondly, on youtube,do you think you're taking share of tv dollars currently? and if not, what's neededto do that going forward?
thanks. pichai: on the first one,you know, we obviously, over many, many years, you know, we alwaysput users first. and as we presentour search results, we have long-term metricsfor user happiness around which we make-- you know, that's the frameworkfor all the changes we make. you know, obviously,with the shift to mobile,
the user experience--users are evolving in terms of how they useour product, and with that as a guidance,we've made changes. if you make many, many changes, and i would look at itholistically, and even some of the changesyou're talking about affect certainhighly commercial queries where users are actually lookingfor that commercial information. so, you know, the metricsis what drives
how we change these things, and we are very,very thoughtful about it. but we always have to step backand make sure the overall load, et cetera,is really working for users. and i'm pretty comfortablewith how we're approaching it. on youtube, you know,i think about it as, you know, we are seeingstrong growth. you know, i mentioned themomentum behind google preferred and how we are doublethe rate we were last year.
so, to me, that implies,you know, strong growth. it's tough for us,whether it's from tv or just, you know,advertisers investing more because there's tractionin youtube. but, you know, we just seestrong momentum. and, you know, as for us, today, when i just look at how usersare using mobile, video is the killer formaton mobile, and i think that's what gives us
the secular trendmoving forward. man: thank you. mark mahaney of rbccapital markets. mahaney: thanks, i just wantto ask one question, and it has to dowith mobile search, and i want to throwan idea by you, which is, you know, we've beengoing through this mobile transitionfor four or fives years. consumers have, i think,dramatically led
the businesses and advertisersto mobile devices. i'm wondering if what you'renow seeing is finally, as e-commerce and traveland other commerce activities have really become criticalmaterial on mobile devices, you're finally startingto see ad budgets really shift over, and you're startingto get auction dynamics, start to pick upin mobile search. so if you just commenton whether you're finally
seeing this kind of backswingfor advertisers to engage with mobile search in a way that you reallyhadn't seen before, it just took that many yearsfor this to happen? pichai: mark, thanksfor the question. you know, i would say,at a higher level, i mean, this is a scalebusiness, and you're right. you know, as we have hadthis shift to mobile that our second old graphics,which kick in too.
which is why, when you lookat our ad improvements and our revenue improvements,i would focus more holistically. you know, we do deeper changesacross the board, not just with simple changeson the page, and all of thatcontributes to it. so, you know,i do definitely think, as the shiftto mobile accelerates, we are getting some scalebenefits, and that's part of it. dan salmon of bmo.
salmon: hey, good afternoon,everyone. sundar, i was wonderingif you could spend a little time talking about the launchof the my activity site, which i think is an updateto the controls that your users haveover the use of their data. and in particular,i'd be interested to hear about the option to opt in togreater personalization of ads from across usershipon google sites, as i believethat's the first time
you've allowed,on an opt-in basis certainly, to have search data be usedto target ads elsewhere. and then, maybe as a follow-upto that, what you're seeingin terms of early traction of users turning that on, and where your expectationsfor that may be. pichai: look, i mean,you know, we are-- you know, we are very focusedon giving users better controls, and so we wanted to give usersa single place
to see and control ad settings, and that'll be honored asthe user moves across devices. it's completely opt-in. users are absolutelyin control. and, you know, consumersand advertisers have come to expect the ads to work betteracross devices, and this new option couldhelp us better deliver on that. so for people who chooseto opt in over time, we could make sure they seemore relevant ads
and fewer annoying ones, so effectively put themin better control of the experience they get. and i think--and so, i think that helps the whole ecosystem work better. we are in very, very early days, but we are being thoughtfulabout how we do this for users. colin sebastianof robert baird. sebastian: great, thanks.
i guess two quick questions. first off, we understand thatgoogle shopping in particular continues to see strong growth, and i was hopingyou could add some color on the relative mix, or of growth of pla contrastingwith other ads sites, along with the adoption oftransactional capabilities. and then, sundar,i wanted to follow up on some of the conversationaland voice applications
and devices that you havein the pipeline, and more generally,how you envision voice really fitting inacross the board, across the google platform. will this be sort ofa centerpiece as you also utilizemachine learning and artificial intelligence? i'd like to hear moreabout your vision for that. pichai: you know, let me,quickly, on the first one,
you know, we don't commenton the relative mix, et cetera, so i'll probably give more coloron your second question. you know, voice is obviouslyvery, very exciting for us. i mentioned this at i/o. you know, if you lookat the google app on android, in the u.s., 20% of the queriesare voice queries. so today, in terms of evolvingto a conversational assistant, we have a big head start. people do this.
we get millions of queriesevery single day. and it's incredibly excitingto see how people interact with voice,you know, differently from text. it's more intuitive;it's more personal. and, you know,it's a bit more emotional and engaging experiencefor users. and so, i think,to do this well, you know, requiresdeep computer science, just understandingwhat they are saying,
the natural languageprocessing involved. these are areas in whichwe have now been working for over 15 years. and, you know, we believewe are the best in class. and so bringing all of thattogether, i think, is what will help usdo this at scale globally. but it's still very early days, in terms of getting theconversational assistant right. you will see us launch thisthroughout products
as we go through the second halfof this year, and i'm excited to seehow users respond to it. sebastian: thank you. anthony diclemente of nomura. diclemente: great,thanks for taking my questions. i have one for sundarand one for ruth. sundar, in terms of messaging, you mentioned allo,your mobile messaging product, and duo, which is yourvideo messaging product.
why is it important that google is competitivein mobile messaging? and what gives youthe confidence that you could take market share from the other playersin the messaging space? and then, ruth, in terms ofthe drivers of youtube growth, you mentionedin your prepared remarks that one of the driverswas buying just want to maybe heara little bit more about that.
why has that beenso successful recently? and do you look at thatas an incremental forward driver of youtube revenue growth? pichai: you know,on your first question, you know, i think messagingis obviously an important area. we approach these areasif we believe we have insights by whichwe can create something very differentiated for users, that we're actually approachingit in a new and unique way.
the core underlying insightwe have is, in the context of mobile and using, you know, state-of-the-artmachine learning, can be reaching some of theseareas for our users. so that'sthe underlying framework with which we haveapproached this space. i've been really enjoyingusing these products, you know, and we'll get itout to users soon.
for example, i think if you takesomething like duo today, i think especially on android,you know, high-quality messagingis an experience that's still, you know,lacking for users, so we clearly seean opportunity there. and it's at the coreof our mission, bringing informationalexperiences to users. and so, that's whywe are investing and we are optimisticabout this space.
porat: and i think,the other part of your question, i think the key point is,we've been talking about programmaticfor quite some time. we're just seeing strongmomentum across the board and continue to benefitfrom that. diclemente: thank you. ben schachter of mcclary. schachter: sundar,can you broadly discuss the google hardware strategy
and, perhaps,some of the lessons learned from previousgoogle hardware launches? and then, relatedly,can you discuss a little bit about how you're thinkingabout the auto strategy? do you build your own vehicles,license the technology? how do you determinewhich direction to take there? and how long until we might seeany auto-related revenue? pichai: you know, our wholehardware strategy, we've always--we've donedevices like nexus
or google pixel, et cetera. we realize a lot of computinginnovations happen at the intersectionof hardware and software. and as we are buildingecosystems and broad platforms, we need a wayto drive them forward. and so, that's the contextin which we do. there are areas where we havedone it very seriously. like, chromecastis a great example. we now have over 30 millionchromecast devices sold.
and, you know, that's an exampleof where we invest deeply. and especially as newer areasemerge, like google home, we want our ability to putthe best experience possible in front of our usersand guide the ecosystem. so that's how we think about it. we are beingmuch more thoughtful in how we approach it, and we are buildinga world-class team so that we can do thisfor our users,
but, you know, we arevery thoughtful about how we approach it, and we make sure to workwith the ecosystem to accomplish what we aretrying to do. porat: and then, on cars, self-driving is inour other bets area, and so,just a brief update there. we're now testingin four cities: mountain view, austin,
most recently we expandedto kirkland, washington, and to phoenix. we've self-drivenover 1.6 million miles. and the focus here for us is, we're solvinga really big need-- safety, access,and city efficiency. you know, the thingthat's really motivating for us is when you lookat over 30,000 car dusts in the u.s. alone,
you know, that's what reallyinspired the founders to start working on this issue. and our approach is quitedifferent from most others. we're focused onfully autonomous cars, because in early testingwe saw the risk of depending on driversto remain engaged once you give themthe option to switch off. so we've invested a lot there. we're testing extensivelybased on this approach.
and most specificallyto your question, we're pleased to be workingwith fca to advance the developmentof the self-driving cars. with them,we're more than doubling the number of cars that we have, but we do have huge respectfor the expertise required, so we do expect we'll workwith many partners in this area. justin post of merrill lynch. post: thank you,a couple questions.
first, on youtube, just thinkingabout premium content. a lot of activitywith streaming deals out there. obviously youtube would bea natural place for streaming content, but even professionallydeveloped content. do you think you're lettingan opportunity get by? how do you think about that? and then, ruth, i know you havea lot of experience dealing with regulatory agenciesin your last cfo role.
there's been some new filings. can you talk at allabout how google's thinking about that right now? porat: so i'll starton the second question. we continue to workconstructively with regulators. we don't have an updateon timing on any of the specific issues. but the main points,in our view, are that regulators have found
that our businessesdo help consumers. and the key mantra here is, if we do the right thingfor the user, all else will follow. you know, with respectto consumers, we continue to investin innovative opportunities that create great experiences,improve their lives. and we're empoweringsmall businesses globally by providing greater reach
to customersnot just in their towns but across countriesand around the world. you know,and in our discussions, one of the veryimportant points is, we operate in a very vibrantand competitive environment. and we're also proud of the fact that we're investingmeaningfully in the ecosystem. for example,android has helped foster a remarkable and sustainableecosystem of manufacturers
and app developersand entrepreneurs based on open-source softwareand open innovation. and that's reallykind of the thrust of it. and the emphasis is, we're continuing to workconstructively with regulators. no additional update. pichai: and, justin,on the livestreaming question, you know,i already have mentioned that, you know, livestreamis a big focus for us.
we've been at it for a while, and we built a great robustand and mature platform for big events. we just announced our plansto make mobile livestreaming features available withinour core youtube app on all mobile devices. you know, our stream time,livestream time has increased 3x sincethe beginning of the year alone. and youtube is the firstmajor platform
to support live contentin 360 degrees. and, you know, recent examples, even the rnc and the dncconventions, you know, they've been livestreamedon youtube in 360. and so there's a lotof momentum there, and we are absolutelycommitted to the space. and our final question comes from brian nowakof morgan stanley. nowak: thanks for takingmy questions; i have two.
the first one is on the u.s.,accelerated pretty nicely. any specific bucketsof advertisers or any ofthe innovative products that you'd call out as driving that accelerationin the quarter? then, the second one,sundar, you talked about using machine learning forbetter suggestions on youtube. can you just help us at allthink about what the level of engagement ison youtube right now,
whether it's minutesor many gross dimensions? how do we thinkabout engagement on youtube now? porat: so, in terms of the u.s.,the 25% year on year growth reflects strengthacross products. there's really nothingto call out. it's a modest acceleration consistentwith what we saw overall, but it's reallyabout mobile search. pichai: you know, on youtube,at a high level,
i would say we don't haveany new metrics. but, you know, on mobile alone,as i've said before, we reach more 18-34and 18-49s than any other tv network,broadcast or cable. and every indication we see is that the growthis very, very strong, being driven by mobile. and it's growingglobally as well. so, overall, i think engagementis very, very healthy.
i'm pretty excited about it. man: great, thanks. and that concludesour question-and-answer session for today. i'd like to turn the callback over to ellen west for closing remarks. west: thanks, everyone,for joining us today. we look forward to speakingwith you again on our third quarter 2016 call.
woman: ladies and gentlemen, thank you for participatingin today's conference. this does conclude the program,and you may all disconnect. have a great day, everyone.
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