Alphabet Inc. (GOOG) Q3 2023 Earnings Call Oct. 24, 2023
Sundar Pichai - Chief Executive Officer
Business Performance:
The CEO expressed satisfaction with the company's Q3 business results, showcasing strong growth in Search, YouTube, and promising momentum in Cloud.
Google celebrated its 25th anniversary in September, reflecting on the progress made over the last quarter-century and looking forward to AI-driven opportunities.
Product Momentum:
Alphabet continued to witness product momentum, exemplified by events like Cloud Next, Made on YouTube, and Made by Google, all geared toward making AI more helpful for everyone.
Four key focus areas were highlighted:
Improving Knowledge and Learning:
Notable developments include the Search Generative Experience (SGE), which integrates Generative AI capabilities into Search, allowing for the inclusion of videos, images, and generated code responses. SGE has seen positive feedback, with plans for expansion into new markets.Boosting Creativity and Productivity:
Bard, an interface to a conversational LLM, now integrates with Google apps and services, providing relevant information.
Assistant with Bard, a personal assistant powered by Generative AI, was introduced, offering text, voice, and image interactions.Enabling Developers and Businesses:
Google Cloud's Q3 revenue reached $8.4 billion, with more than 60% of the world's largest companies as customers.
Google Cloud is attracting AI startups, offering advanced infrastructure and AI-optimized tools.Building and Deploying AI Responsibly:
Efforts are made to identify AI-generated content online, such as watermarking images with invisible technology powered by Google DeepMind SynthID.
Foundational research from Google DeepMind and Google Research supports these initiatives.
YouTube Momentum:
YouTube reported solid growth in both its advertising and subscription businesses during Q3, including the successful launch of NFL Sunday Ticket with multi-view features.
YouTube Shorts experienced substantial growth, with over 70 billion daily views and more than 2 billion monthly users.
Tools for creating engaging content, like Dreamscreen and YouTube Create, were introduced.
Google Cloud Success:
Google Cloud's Q3 revenue reached $8.4 billion, demonstrating 22% growth.
Over 60% of the world's top 1,000 companies are Google Cloud customers.Google Cloud showcased innovations in infrastructure, data and AI, workspace collaboration, and cybersecurity solutions during Cloud Next.
Google Cloud supports thousands of customers and partners in harnessing AI's potential, with applications across various industries.
Hardware Innovations:
New hardware products, including Pixel 8, Pixel 8 Pro, and Pixel Watch 2, received positive feedback and reviews.
Pixel, Google's smartphone brand, is the fastest-growing in top markets, and it's the only one that saw growth in units sold year-over-year.
Google's custom chip, Google Tensor G3, powers transformative experiences and AI-driven features, such as AI-powered editing in Google Photos.
Chromebook Plus, a new category, brings the best of Chrome with powerful AI capabilities, offering regular automatic updates for ten years.
Other Bets:
Waymo expanded its commercial ride-hailing service to more riders, adding over 100,000 people from the San Francisco waitlist and planning to do the same in Austin.
Wing and Walmart announced a partnership for drone delivery services in the Dallas-Fort Worth area.
The CEO's remarks reflect Alphabet's ongoing commitment to leveraging AI across its products and services, with a focus on innovation, responsible AI deployment, and expanding its presence in various markets.
Philipp Schindler - Chief Business Officer
Performance Overview:
Google Services revenues reached $68 billion, marking an 11% YoY growth.
Google Advertising:
Google Advertising, encompassing Search and Other, reported an 11% YoY revenue increase, primarily driven by robust growth in the Retail vertical.
YouTube Ads experienced a 12% YoY revenue growth, fueled by both brand and direct response advertising.
However, Network revenues declined by 3% YoY.
Google Other revenues surged by 21% YoY, with YouTube subscription revenues leading the growth.
Google AI and Advertising:
Recent advancements in foundational research models, LLM, and Generative AI are enhancing performance for advertisers and user experiences.
Innovations such as conversational experiences in Google Ads, updates to Performance Max, and new campaign types like Demand Gen were introduced.
Experimentation with new ad formats on Search Generative Experience (SGE) while ensuring advertisers can connect with potential customers along their Search journeys.
Retail Focus:
The Retail sector had a strong quarter, with AI-powered solutions like Search and Performance Max delivering reliable ROI for retailers.
Preparations were made for an extended holiday season with tools like OptiScore and Performance Planner to uncover new opportunities, plan budgets, and optimize inventory and pricing strategies.
Trends like deals queries, free shipping, and omni-channel retailing were addressed through merchant promotions, fulfillment options, and improved deal visibility on Search.
YouTube's Long-Term Growth:
YouTube's focus on creator success and a multi-format strategy drives long-term growth, emphasizing Shorts, connected TV (CTV), and subscriptions.
Shorts and CTV continue to gain watch time and engagement, with monetization efforts showing progress.
YouTube remains the top overall streaming destination in the US.
Investments are made in Google AI-driven creation tools and ad solutions to enhance storytelling and ad effectiveness across formats.
AI-Powered Advertising Solutions:
AI-enhanced creation tools like Dreamscreen and YouTube Create are introduced.
Ad solutions leverage AI for improved targeting and reach, such as Spotlight Moments, video reach campaigns, and video view campaigns.
The Demand Gen campaign combines video and image ads to optimize and measure performance across YouTube and Google, delivering successful outcomes for brands.
Commitment to Ecosystem and Partners:
Google News Showcase, a curated news experience and licensing program, was launched with over 150 news publications in the US.
Globally, more than 2,500 news publications have joined News Showcase in 23 countries.
Alphabet remains committed to open access to news and information.
These highlights emphasize Alphabet's focus on AI-driven innovations, strong performance in advertising, and a commitment to enhancing user experiences and partnerships across its various platforms and services.
Ruth Porat - Chief Financial Officer
Alphabet's Q3 Financial Highlights
Consolidated Revenues:
Consolidated revenues for Q3 reached $76.7 billion, marking an 11% YoY growth in both reported and constant currency terms.
Search remained the primary contributor to revenue growth during this period.
Expenses Breakdown:
Total cost of revenues amounted to $33.2 billion, up 7% YoY, primarily driven by other cost of revenues, which reached $20.6 billion, reflecting a 6% increase.
Growth was largely due to content acquisition costs, especially for YouTube subscription offerings.Operating expenses totalled $22.1 billion, up 6% YoY, with notable increases in R&D expenses (driven by compensation), G&A expenses (related to legal matters), and sales and marketing expenses (relatively flat compared to the previous year).
Operating Income and Margin:
Operating income for the quarter stood at $21.3 billion, showing an impressive 25% YoY increase.
The operating margin was 28%.
Other Income and Expenses:
Other income and expense resulted in a loss of $146 million.
Net Income:
Net income for the quarter was $19.7 billion.
This was influenced by an effective tax rate of 7% in Q3 due to an IRS change regarding foreign tax credits, resulting in a catch-up for prior periods.
Free Cash Flow:
Alphabet generated free cash flow of $22.6 billion during Q3.
Over the trailing 12 months, the company accumulated $78 million in free cash flow.
Cash and Marketable Securities:
The quarter concluded with $120 billion in cash and marketable securities.
It's worth noting that cash balance and free cash flow for Q2 and Q3 benefited from deferred tax payments to Q4 2023.
Segment Results:
Google Services:
Google Services reported revenues of $68 billion, marking an 11% YoY increase.
Google Search and other advertising revenues reached $44 billion, up 11%, primarily driven by growth in the retail sector.
YouTube advertising revenues were $8 billion, showing a 12% YoY growth due to brand and direct response advertising.
Network advertising revenues decreased by 3% YoY.
Other revenues reached $8.3 billion, surging by 21%, primarily driven by growth in YouTube non-advertising revenues due to subscriber growth.
Google Services' operating income was $23.9 billion, with an operating margin of 35%.
Google Cloud:
Google Cloud segment revenues were $8.4 billion, reflecting a 22% YoY growth.
Google Cloud Platform (GCP) revenue growth remained strong across geographies, industries, and products.
Google Workspace contributed to strong revenue growth, primarily through an increase in average revenue per seat.
Google Cloud reported an operating income of $266 million, with a 3% operating margin.
Other Bets:
For Q3, revenues from Other Bets were $297 million, while the operating loss amounted to $1.2 billion.
Outlook:
In advertising, Alphabet is pleased with the year-on-year revenue growth in Search and YouTube advertising for Q3.
Growth in YouTube subscription products is expected to continue.
Q4 results will include a full quarter of NFL Sunday Ticket revenues, resulting in associated content acquisition costs.
The Play segment showed growth in Q3, driven by an increased number of buyers.
Hardware revenues face headwinds in Q4, partly due to portfolio optimization and launch timing differences.
For Google Cloud, engagement with GCP and Workspace remains strong, and the potential benefits of AI solutions are recognized.
Alphabet continues to invest aggressively, focusing on profitable growth and cost optimization.
Cost control measures include slower headcount growth, real estate optimization, improving operational efficiency, and streamlining spend with suppliers and vendors.
Reported CapEx reflects significant investments in technical infrastructure, with AI compute being a major area of focus.
Alphabet anticipates elevated levels of investment, increasing in Q4 2023 and continuing to grow in 2024.
Alphabet expresses excitement about future opportunities and remains committed to delivering sustainable financial value.
Q&A followed.
Anne Chapman
Dynamic Trader Twitter
Dynamic Trader LinkedIn
Let's go trade!
