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  • woman: Good day, ladies and gentlemen,

  • and welcome to the Alphabet Inc.

  • first quarter 2018 earnings call.

  • At this time, all participants are in a listen-only mode.

  • Later, we will conduct a question-and-answer session,

  • and instructions will be given at that time.

  • If anyone should require operator assistance,

  • please press star then zero on your touch-tone telephone.

  • I'd now like to turn the conference over to Ellen West,

  • Head of Investor Relations. Please go ahead.

  • West: Thank you. Good afternoon, everyone,

  • and welcome to Alphabet's first quarter

  • 2018 earnings conference call.

  • With us today are Ruth Porat and Sundar Pichai.

  • Now I'll quickly cover the safe harbor.

  • Some of the statements that we make today

  • may be considered forward-looking,

  • including statements regarding our future investments,

  • our long-term growth and innovation,

  • the expected performance of our businesses,

  • and our expected level of capital expenditures.

  • These statements involve

  • a number of risks and uncertainties

  • that could cause actual results to differ materially.

  • For more information, please refer to the risk factors

  • discussed in our form 10-K for 2017 filed with the SEC.

  • Undue reliance should not be placed

  • on any forward-looking statements,

  • and they are made based on assumptions as of today.

  • We undertake no obligation to update them.

  • During this call, we will present both GAAP

  • and non-GAAP financial measures.

  • A reconciliation of GAAP to non-GAAP measures

  • is included in today's earnings press release.

  • As you know, we distribute our earnings release

  • through our investor relations website

  • located at abc.xyz/investor.

  • This call is also being webcast from our IR website

  • where a replay of the call will be available later today.

  • And now I'll turn the call over to Ruth.

  • Porat: Thank you, Ellen.

  • We delivered ongoing strong revenue growth up

  • 26% year-on-year and up 23% in constant currency.

  • The sustained outstanding performance in Sites

  • revenues in particular

  • reflects the combined benefits of innovation

  • and secular growth,

  • with mobile search again leading the way.

  • Robust growth in Network revenues was again

  • led by our programmatic business.

  • Ongoing substantial growth in Other revenues,

  • namely Cloud, Hardware, and Play,

  • continues to highlight the growing contribution

  • of our non-ads opportunities.

  • Our outline for today's call is first I'll review the quarter

  • on a consolidated basis for Alphabet,

  • focusing on year-over-year changes.

  • Second I will review results for Google and then Other Bets.

  • As we highlighted in our earnings press release,

  • our results this quarter were affected

  • by a new accounting standard

  • that changes the way companies account

  • for equity security investments.

  • I'll highlight the impact on particular line items

  • as I review the quarter.

  • I will then conclude with our outlook.

  • Sundar will then discuss business

  • and product highlights,

  • after which we will take your questions.

  • Starting with a summary of Alphabet's

  • consolidated financial performance for the quarter,

  • our total revenues of $31.1 billion

  • were up 26% year-over-year.

  • We realized a positive currency impact

  • on our revenues year-over-year of $1.3 billion,

  • or $1.1 billion after the impact of our hedging program.

  • Turning to Alphabet's revenue by geography,

  • you can see that our performance was strong again

  • in all regions.

  • U.S. revenues were $14.1 billion,

  • up 20% year-over-year.

  • EMEA revenues were $10.5 billion,

  • up 29% year-over-year.

  • In constant currency terms EMEA grew 21%,

  • reflecting strengthening of both the Euro

  • and the British pound.

  • APAC revenues were $4.8 billion, up 33% versus last year

  • and up 30% in constant currency,

  • reflecting strengthening of the Japanese

  • Yen and Australian dollar.

  • Other America revenues were $1.7 billion,

  • up 36% year-over-year and up 35% in constant currency.

  • On a consolidated basis, total cost of revenues including TAC,

  • which I'll discuss in the Google segment results,

  • was $13.5 billion, up 37% year-on-year.

  • Other Cost of Revenues on a consolidated basis

  • was $7.2 billion, up 39% year-over-year,

  • primarily driven by Google-related expenses.

  • The key drivers were first

  • cost associated with our data centers

  • and other operations, including depreciation,

  • which was affected by a reallocation of certain

  • operating expenses primarily from G&A.

  • Second, content acquisition costs, primarily for YouTube,

  • and finally hardware-related costs.

  • Operating expenses were $10.7 billion,

  • up 27% year-over-year,

  • with the biggest increase in R&D expenses,

  • reflecting our continued investment in technical talent.

  • The growth in Sales and Marketing expenses

  • reflects advertising investments in Cloud

  • and Hardware as well as the Assistant.

  • G&A expense trends were affected this quarter

  • by a number of factors,

  • in particular performance fees accrued in connection

  • with the recognition of equity security gains,

  • which were partially offset by the reallocation of certain

  • expenses from G&A,

  • primarily to Other Cost of Revenues

  • and the benefit of the Uber litigation settlement.

  • Stock-based compensation totaled $2.5 billion.

  • The quarter-on-quarter step-up

  • reflects the full-year equity refresh grant

  • to employees at the beginning of the quarter

  • and the bi-annual grant to SVPs.

  • Headcount at the end of the quarter was 85,050,

  • up 4,940 people from last quarter,

  • including just over 2,000 people

  • who joined at the end of January

  • when we closed our previously -announced deal with HTC.

  • As in prior quarters, the majority of new hires

  • were engineers and product managers.

  • In terms of product areas,

  • the most sizeable headcount increases

  • were the additions from HTC,

  • followed by hiring in Cloud

  • for both technical and sales roles.

  • Operating income was $7 billion, up 7% versus last year,

  • and the operating margin was 22%.

  • Other income and expense was $3.5 billion,

  • which includes $3 billion of primarily unrealized

  • gains in equity security investments

  • recognized under the new accounting standard.

  • We provide more detail on the line items within OI&E

  • in our earnings press release.

  • Our effective tax rate was 11% for the first quarter.

  • As outlined in our earnings press release,

  • this includes a five percentage point reduction

  • from the release of a deferred tax asset valuation allowance

  • which offset the income tax

  • expense on the equity security gains.

  • Net income was $9.4 billion,

  • and earnings per diluted share were $13.33.

  • As indicated in the table in our earnings press release,

  • these results reflect an increase

  • in net income of $2.4 billion

  • and $3.40 in earnings per diluted share

  • due to the impacts from the gains

  • on equity security investments we've already discussed.

  • Turning now to capex and operating cash flow.

  • Cash capex for the quarter was $7.3 billion,

  • which I'll discuss in the Google segment results.

  • Operating cash flow was $11.6 billion with free cash

  • flow of $4.3 billion.

  • We ended the quarter with cash and marketable securities

  • of approximately $103 billion.

  • Let me now turn to our segment financial results.

  • Starting with the Google segment,

  • revenues were $31 billion,

  • up 26% year-over-year.

  • In terms of the revenue detail,

  • Google Sites revenues were $22 billion in the quarter,

  • up 26% year-over-year, led again by mobile search,

  • complemented by solid growth from desktop search

  • and strong performance from YouTube.

  • Network revenues were $4.6 billion,

  • up 16% year-on-year,