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Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N

Q1 2018 Alphabet Inc Earnings Call
APRIL 23, 2018 / 8:30PM GMT

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Corporate Participants
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* Ellen West
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* Ruth Porat
Alphabet Inc. - Senior VP & CFO
* Sundar Pichai
Alphabet Inc. - Director & CEO of Google

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Conference Call Participiants
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* Stephen D. Ju
Crédit Suisse AG, Research Division - Director
* Eric James Sheridan
UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst
* Brent John Thill
Jefferies LLC, Research Division - Equity Analyst
* Daniel Salmon
BMO Capital Markets Equity Research - Media and Internet Analyst
* Ross Adam Sandler
Barclays Bank PLC, Research Division - MD of Americas Equity Research and Senior Internet Analyst
* Mark Stephen F. Mahaney
RBC Capital Markets, LLC, Research Division - MD and Analyst
* Michael Brian Nathanson
MoffettNathanson LLC - Founding Partner & Senior Research Analyst
* Brian Thomas Nowak
Morgan Stanley, Research Division - Research Analyst
* Colin Alan Sebastian
Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
* Anthony Joseph DiClemente
Evercore ISI, Research Division - Senior MD
* Heather Anne Bellini
Goldman Sachs Group Inc., Research Division - MD & Analyst
* Douglas Till Anmuth
JP Morgan Chase & Co, Research Division - MD

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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the Alphabet Inc. First Quarter 2018 Earnings Call. (Operator Instructions) I'd now like to turn the conference over to Ellen West, Head of Investor Relations. Please go ahead.

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Ellen West, - [2]
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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.

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [3]
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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 the 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 the 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, costs 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 the 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 biannual 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 sizable headcount increases were the additions from HTC followed by hiring and 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 5 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 impact from the gains in 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, reflecting the ongoing momentum of programmatic and AdMob. Other revenues for Google were $4.4 billion, up 36% year-over-year fueled by cloud, hardware and Play. As a reminder, the hardware revenues in this line now include our Nest business, and prior periods were restated.
We continue to provide monetization metrics in our earnings press release to give you a sense of the price and volume dynamics of our advertising businesses. As we previously announced, we made a change this quarter to impression-based monetization metrics for our network business given the ongoing growth of programmatic.
Total traffic acquisition costs were $6.3 billion or 24% of total advertising revenues and up 36% year-over-year. This year-on-year increase in sites TAC, as a percentage of sites revenues as well as network TAC as a percentage of network revenues, continues to reflect the fact that our strongest growth areas, namely mobile search and programmatic, carry higher TAC. Total TAC, as a percentage of total advertising revenues, was up year-over-year, reflecting primarily an increase in the sites TAC rate, which was modestly offset by a favorable revenue mix shift from network to sites. The increase in the sites TAC rate year-over-year was driven by changes in partner agreements and the ongoing shift to mobile, which carries higher TAC. The underlying trend affecting the network TAC rate year-over-year continues to be the shift to programmatic, which carries higher TAC.
Google's stock-based compensation totaled $2.3 billion for the quarter, up 22% year-over-year. Operating income was $8.4 billion, up 12% versus last year, and the operating margin was 27%. Accrued CapEx for the quarter was $7.7 billion, reflecting investments in facilities, production equipment and data center construction. Facilities was the largest component of CapEx of this quarter due primarily to the $2.4 billion purchase of Chelsea Market that we announced in March.
Let me now turn and talk about Other Bets. For the first quarter, Other Bets revenues were $150 million, primarily generated by Fiber and Verily. As a reminder, Nest results are now reported as part of the Google segment, with revenues reflected in the Google other revenues line. Operating loss was $571 million for the first quarter. Other Bets accrued CapEx was $55 million.
We're pleased with our progress across Other Bets. A couple of updates. At Waymo, we have achieved 5 million miles of driving on city streets, adding the latest million in just 3 months. We also announced a long-term partnership with Jaguar Land Rover for their fully electric I-PACE vehicles. Verily is seeing good progress with Onduo, its joint venture with Sanofi. The companies made its diabetes management platform commercially available in 3 states with Blue Cross Blue Shield of Arkansas and South Carolina and Anthem's health plan in Georgia.
Let me close with some observations on the quarter and our longer-term outlook. First, with respect to revenues. The opportunity set ahead of us is quite extraordinary, and we remain focused on investment to support long-term revenue and profit growth. We have both the business confidence to invest appropriately in the next phase of innovation as well as clarity about some very compelling opportunities that, in our judgment, will enable us to create shareholder value. We're pleased with the continued momentum of our revenue growth again this quarter, reflecting strong underlying trends across our business, which are amplified by our relentless focus on innovation, not only in our newer businesses, like cloud and hardware, but in our sites business. Specifically, we're excited by the still sizable opportunity in search advertising led by mobile. At 26% year-on-year revenue growth in our sites business, we continue to benefit from our investments to enhance the user and advertiser experience.
Second, with respect to profitability. Within cost of revenues, the biggest component is TAC. While we expect sites TAC to continue to increase as a percentage of sites revenues, reflecting ongoing strength in mobile search, we continue to anticipate that the pace of year-over-year growth in sites TAC, as a percentage of sites revenues, will slow beginning in this second quarter.
Within OpEx, as I said last quarter, we are continuing to support our priority investment areas. Within R&D, this is reflected in increased headcount, particularly for technical roles. Sales and marketing is similarly elevated to support these areas, both in the quarter and for the full year, and we expect expenses to remain more heavily weighted toward the back half of the year to support the holiday season.
As you've seen in prior quarters, G&A can be a more difficult line to forecast. In particular, this quarter, we had the impact of the accrual for performance fees related to the equity gains previously discussed, partially offset by the reallocation of some expenses to other cost of revenues and the Uber legal settlement. We appreciate the importance of prioritization and are keenly focused on the steps we can take to make the right investments with the proper intensity while being diligent about long-term plans and returns.
For our Other Bets, we remain focused on moving toward commercial applications in a number of areas with a continued focus on calibrating investment to metrics for success.
Third, with respect to CapEx. Our commitment to growth is evident in the trend in CapEx investment, almost equally split this quarter between compute capacity and facilities. Our facilities spent in Google dominated by the Chelsea Market acquisition reflects that we favor owning rather than leasing real estate when we see good opportunities. With respect to compute capacity, the largest component of CapEx is for machines that incorporate the latest technologies. We are also investing in data center growth and increased network capacity through undersea cables. These combined investments will expand our compute capacity to support our growth outlook across Google, including machine learning, the Assistant and cloud.
In many respects, these investments underscore my opening comment about both our confidence and clarity about future opportunities with our focus on proprietary solutions that enable us to deliver the secure, reliable, high-performing compute infrastructure to support new and emerging products and services for our users, advertisers and enterprise customers.
I will now turn the call over to Sundar.

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [4]
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Thanks, Ruth. The end of Q1 is always an exciting time as we prepare for our annual developer conference, Google I/O. Computing is evolving at a rapid rate, and we can't wait to share what's next and how we are tackling important issues.
I want to call out an important highlight from Q1, the Google news initiative that we unveiled in March. Over the years, we have worked closely with the news industry to address key challenges through projects like Accelerated Mobile Pages. We are building on that partnership with the $300 million investment to elevate and strengthen quality journalism. As part of this effort, we announced more than a dozen new products, including Subscribe with Google developed in close collaboration with publishers, which lets you use your Google account to buy a subscription on participating news sites. We've had overwhelming interest.
Since the launch, we have heard from more than 300 news publishers who are interested in Subscribe with Google. We also introduced new tools for journalists and improvements to our platforms to ensure that we are surfacing accurate quality content where it matters most.
Today, I'll quickly talk about how machine learning is helping us advance that mission, then I'll highlight progress in our 3 big areas, cloud, YouTube and hardware, and share updates on our computing and advertising platforms.
First, machine learning and making information accessible to everyone. Our own ML-powered products like Google Photos and Google Lens gets better every day. The Google Assistant is a great example of this. In the home, we have added over 200 new device partners that work with Assistant just on the last 4 months alone. We now partner with all major manufacturers of connected devices for the home in the U.S.
All told, the Google Assistant can now help you with over 1 million actions, including new things like reminding you to buy bread when you get to the store or sending money to friends or if you want to get a ride share home. For a concept we unveiled at I/O less than 2 years ago, this is great progress.
AI is also unlocking new opportunities for everyone. Just in the last few months, we have seen some amazing applications from dairy farmers in Georgia using TensorFlow to improve the health their herds to our own Google researchers who figured out how to use ML techniques to assess a person's risk of a heart attack. The possibilities of AI in health care are truly exciting.
At our recent TensorFlow summit, we introduced TensorFlow hub, making it easier for developers to share and reuse models so that we can work together to tackle even more problems and get to better ideas faster. Our investments in this area are helped because of our specialized Tensor Processing Units, which are specifically designed to be highly efficient for machine learning applications.
Of course, we continue to advance Google's core mission in other ways, too. We recently launched our Google Go app in 26 African countries. This app reduces the amount of data needed to display search results by 40%, and we continue to invest in ways to give people granular and easy controls over their information across all our products. Every single day, nearly 20 million people visit My Account, which gives them options to review their Google security, privacy and ad settings. Additionally, tools like security checkup and privacy checkup prompt people to keep their account secure and control their data settings.
Now turning to our 3 big areas: cloud, YouTube and hardware. Last quarter, we shared some exciting metrics about the progress of Google Cloud, including that we passed $1 billion per quarter in 2017. In Q1, we saw increasing momentum. We are growing across the board and are also signing significantly larger, more strategic deals for cloud. Our security capabilities, the easy-to-use advanced data analytics and machine learning solutions and the secure and industry-leading collaboration platform, G Suite, are winning customers over. Google Cloud is growing well. Some examples of new technologies announced in the quarter include Cloud AutoML, which makes it easier for companies without machine learning expertise to build complex neural nets and more than 20 new security products.
Our global infrastructure continues to expand to support demand. We commissioned 3 new subsea cables and announced new regions in Canada, Japan, Netherlands and Saudi Arabia, bringing our total of recently launched and upcoming regions to 20.
G Suite has reached a point where it can serve all the needs of a large enterprise, and as a result, grow at a certain inflection point. The Suite is growing from strength to strength. We believe our secure environment is an important factor in driving enterprise customer wins. G Suite customers like Colgate-Palmolive Company tell us that no one offers a better combination of hardware, network and data security. In Q1, we also signed agreements with customers like Airbus and Thailand's Krung Thai Bank. As a result, G Suite revenue growth accelerated in Q1.
Next, YouTube. The platform continues to grow as millions of creators build communities and find opportunity on YouTube. Over the last year, channels earnings 6 figures annually grew more than 40%. This quarter, Dua Lipa's video for New Rules became the 100th video on YouTube to reach 1 billion views. We are also investing in new experiences like life content, where we see tremendous momentum. One recent example was our exclusive Coachella live stream, which had more than 41 million live views from all over the world.
Coachella was YouTube's most viewed live music festival ever. And no surprise, Beyoncé was the most viewed Coachella performance ever on YouTube. Even as we invest in new experiences, we stay very focused on making sure that YouTube remains a safe platform with great content. We are aggressively combating content that violates our strict policies through a combination of user and machine flags. Over 6 million videos removed in Q4 were first flagged by our machine systems, and over 75% of those videos were removed before receiving a single view. We also changed our monetization requirements to better identify creators who contribute positively to the community and drive more ad revenue to them.
Moving to hardware. This quarter, we welcome Nest of the Google hardware team to supercharge our efforts. Nest is building industry-leading products for the home, including new additions like the Nest Hello doorbell and Nest temperature sensor. In 2017, they sold more devices than the previous 2 years combined. They are an incredibly talented team with fantastic momentum.
Google Home continues to be super popular, and we are making it available in many more countries. Just recently, we launched Google Home in many -- in India and Singapore, and the response has been terrific.
Our early 2018 Net Promoter Scores rank among the highest in the industry across all product categories. This shows how much love people have for Made by Google consumer hardware devices and makes us even more excited for what's ahead.
There's great momentum across our computing platforms, like Android and Chrome. At Mobile World Congress, a new generation of Android partner devices was introduced, including Android One phones like the Nokia 7 plus. Android One pairs high-quality hardware with a secured and streamlined software and experience from Google. This quarter, we launched the Acer Chromebook Tab 10, the first Chrome OS tablet designed specifically for education. It is a secure and easily shareable tablet equipped with all the Chromebook features that educators and students love.
And finally, our advertising platforms. We continue to make Google Search and Shopping the best places for people to find and buy products from a range of merchants. We recently announced shopping actions, allowing customers to easily buy from their choice of participating retailers on the Google Assistant and Search with the universal card across mobile, desktop and even Google Home. The results are really helping retailers. Early testing showed that participating retailers see an average increase in basket size of about 30%.
YouTube is delivering great results for our advertisers. To help brands reach broad audiences on YouTube with even more flexibility, we introduced TrueView for Reach, which optimizes in stream ads to reach a wide audience. In beta testing, 9 out of 10 campaigns drove a significant lift in ad recall, with an average lift of nearly 20%.
We are also helping small businesses take advantage of video with the expansion of YouTube Director onsite to over 170 U.S. cities. This gives SMBs access to a professional filmmaker to create and edit their video ads.
Finally, we remain focused on investing in our publisher partners. Last year, we paid $12.6 billion to publishing partners in our ad network. We recently announced AdSense Auto ads. This uses machine learning to analyze ad placements on a publisher's page and show ads when they are likely to perform well while providing a good user experience.
Google's success depends not just on the success of our partners but also on the community's very work. We recently announced the Rolling Study Halls program for rural areas across 12 states. It equips school buses with Wi-Fi devices and onboard educators so that students with long commutes can get their homework done during the trip.
We are also making long-term investments in our offices and data centers around the country. Last month, we announced the purchase of Manhattan's Chelsea Market building. And in Tennessee and Alabama, we broke ground on 2 new data centers, which will have a big economic impact on the local economies. These investments are made hand-in-hand with our commitment to sustainability.
In 2017, we officially met our goal to purchase enough renewable energy to match all electricity consumed by our operations around the world.
I want to close by saying thank you to our employees. It's been a particularly tough few weeks for the Google family, especially at YouTube. I'm so proud of the resilience that our employees have shown, and I'm so grateful for the support we have gotten across the industry and from the community. Thank you.

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Questions and Answers
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Operator [1]
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(Operator Instructions) And our first question comes from Douglas Anmuth of JPMorgan.

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Douglas Till Anmuth, JP Morgan Chase & Co, Research Division - MD [2]
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Ruth, just first on the accounting change, I was just hoping you could clarify. If we're trying to normalize that, is it right that we would be adding back about $632 million to operating income and then reducing EPS by $3.40, and then just on the EPS side, perhaps adjusting for the tax rate? And then just in terms of the business, I just wanted to ask about Waymo. If you could talk a little bit about just the latest timing for the commercial launch in Phoenix and how quickly you'd look to expand to other markets, and then just how you're thinking about the technology and whether you'll license it to others going forward or keep it more proprietary for Waymo services?

Sure. So on the accounting standard, we try to lay out all the component parts clearly on the cover of the earnings release so that you would have it all in one place. I think you summarized it right, but I'll just direct everybody to the earnings release. The net of which was the gain from the equity investments was $2.4 billion to net income. That is net of performance fees as well as the release of a deferred tax asset that we have, so it does reflect $3 billion in gains. And I think you know this, but this quarter, the accounting standard requires marks for everything where there is an observable raise. So these are unrealized -- the majority of them are unrealized, not actually monetized by Alphabet, and then the performance fees are calculated based on investment returns. They're accrued but not paid until an exit event occurs, and they do appear in OpEx. And as you noted, there is also, therefore, the benefit that flows through on the tax line, and that is 5 percentage points of benefit offset to the effective tax rate for the quarter. As it relates to your Waymo question, there was a lot in there. We do remain very excited about the opportunity with Waymo and our continued progress on multiple fronts. It is still very early. In terms of our progress, this year is about offering a service that is safe, that works, that delight users in the Phoenix area. The rider program in Phoenix is open to members of the public, and riders will use a Waymo app to hail one of our fully self-driving cars without a driver at the wheel, and we'll pay for the service. We've also had progress on the vehicle partnerships, as I mentioned in my opening comments. Last month, Waymo announced it signed a long-term strategic partnership with Jaguar beginning with a collaboration to design and manufacture self-driving I-PACE vehicles for Waymo's transportation service. These are all electric cars. This new partnership in the vehicles adds to our strong position with FCA, and the production of the cars begins in 2020. And then we are expanding our testing to more states. We're also working on additional areas like applying the technology to logistics and deliveries and working with cities to help strengthen public transportation and for personal use vehicles. And as we've talked about on a bunch of calls, the opportunity is here for us because we started with safety, and we remain a leader in safety, and we do believe that's the foundation for success, and it builds on the -- all the testing miles that we've done. So we keep coming back to when you create vehicles that drive themselves faithfully, we think there's a lot of potential uses and business opportunities, and that's what we're focused on.

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Operator [4]
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And our next question comes from Heather Bellini of Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [5]
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I wanted to ask 2 quick questions. One, just one on GDPR then one on cloud. On GDPR, just wondering if you could share with us kind of any impact you're thinking about as the implementation occurs later in May, and so any thoughts you could share there would be great. And then on cloud, Sundar, you had mentioned you're seeing a lot of momentum. You said G Suite, I believe, accelerated in Q1. I was wondering if there was any color on the GCP side that you could share from a growth perspective if that business accelerated or not and kind of how were the deal sites trending for that business in particular.

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [6]
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Great. Maybe I'll do the GDPR first. GDPR, I realize, is a fairly new public OPEC. But for us, it's not new. We started working on GDPR compliance over 18 months ago and have been very, very engaged on it. It's really important, and we care about getting it right. And overall, we have long had a very robust and strong privacy program at Google, too. So we are committed to meeting requirements on May 25 and also long term. We are working very closely with advertisers, publishers and our partners. And we will also update all the privacy policies and controls we provide to users worldwide. So it's a big effort. We are very committed to it. We are very focused on getting it right by our users and partners, and that's where our focus is now. On -- Heather, on cloud, I guess your question was about overall growth, and we are continuing -- the momentum has been very strong on cloud as well. We haven't talked about G Suite much, and so we highlighted it the moment I'm there, but cloud is continuing its great growth. We are seeing it across the board. Things worth I would call out is we are seeing larger deals as well. We are seeing good synergies between G Suite and cloud. Areas where we have done acquisitions like Apigee, they are beginning to work in terms of driving synergies to cloud. And the efforts we are beginning to put particular with our partners, that is beginning to bear fruit as well. So we have go-to-market programs now with SAP, Cisco and Salesforce. And I think we are beginning to see early results from that, and hopefully, that translates into more momentum going forward.

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Operator [7]
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And our next question comes from Eric Sheridan of UBS.

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [8]
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Maybe 2 for Sundar, if I can. One, on mobile search, continue to call that out as a point of strength in the results. What are you most excited about in terms of either the product innovation or the ability to get consumers to adopt mobile search more broadly on devices globally, which could lead to more ad budgets moving it to mobile search? And then on hardware, you've now been through 2 years of sort of Pixel devices. You've made the aqui-hire of ETC engineers. Can you give us a sense of what you've learned so far from your hardware efforts and how that might evolve product innovation or go-to-market strategies long term?

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [9]
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On mobile search, for me, mobile obviously raises the bar. And if you look at the evolution of Search, we gave from -- we evolved to stay ahead of user expectations, and we evolved from just providing links to answers. I just feel at a high level the next big evolution we are doing as part of mobile search and assistant is to actually help users complete actions, to help get things done. And it's really hard to do at scale, and that's the work we are doing. And as we do that, it'll impact just -- not just the Assistant but mobile search more broadly. And obviously, that has a commercial impact as well. So we continue to be very excited about the opportunities there. On hardware, the exciting part for us is now, I think we have all the end-to-end capabilities of a world-class hardware organization, along with the quality of the software organizations we have always had. And in this area, it truly takes long-term planning. And so for example, if you think about silicon, et cetera, the longer you can do it, the more advantages you have. And so I definitely feel we are taking the steps towards being able to do this well for the long term. Part of that obviously involves scaling of our go-to-market strategies both in the U.S. and internationally so that we can drive adoption. I said earlier, our Net Promoter Scores show that we are right up there with the best-in-class devices and across all the products we have, not just our Pixel, across our Nest family and everything we do. So the opportunity is clearly there. We're going to lean into it, and it takes 2 to 3 years to really get to the scale where we want to see it and -- but we are committed to getting there.

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Operator [10]
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And our next question comes from Mark Mahaney of RBC Capital Markets.

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Mark Stephen F. Mahaney, RBC Capital Markets, LLC, Research Division - MD and Analyst [11]
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I want to follow up on Heather's question on GDPR, and the question I want to ask is, I understand that you're -- been working for a long time to make sure that you're compliant. But do you think that GDPR or other regulation that you see on the horizon is likely to impact materially the targeting capabilities about that advertisers have on Google? Is there something in the regulation that's going to make Google and its properties less attractive to advertisers? That's the action question I want to ask.

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [12]
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Thanks, Mark. Above everything else, as we are working through GDPR, we are making sure we are focused on getting the user experience right for our users and our partners. But to clarify your question further, first of all, it's important to understand that most of our ad business is Search, where we rely on very limited information, essentially what is in the keywords to show a relevant ad or product. And so we've been preparing this for 18 months, and I think we are focused on getting the compliance right. It'll be a year's long effort, and we are helping not just us but our publishers and partners. But overall, we think we'll be able to do all that with the positive impact for users and publishers and the advertisers and so our business.

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Operator [13]
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And our next question comes from Brian Nowak of Morgan Stanley.

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Brian Thomas Nowak, Morgan Stanley, Research Division - Research Analyst [14]
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I have 2. The first one on desktop search. So it's nice to hear that your oldest business is still growing. Just curious, could you give 1 or 2 tangible examples or products that are still driving the desktop search growth? And Sundar, I understand you're always focused on user experience. At a high level, what do you see is the biggest areas potential further improvement in desktop search? And let me ask you the same question about YouTube. What are sort of the biggest areas of tension that you're focused on improving from a user perspective on YouTube right now?

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [15]
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So on desktop search -- sorry, is your question on the user experience on desktop search, how do we see improvements? Look, I mean, the same. First of all, users are having cross-device experiences, cross-screen experiences, right? So I think your desktop search experience, mobile search, everything goes hand-in-hand. And every -- all the work we are doing to make mobile search better translates to desktop search as well. Areas where desktop search historically has been a bit behind is in terms of things like identity and payments and having all that work well to enhance the user experience. And with Chrome now, we are investing a lot in those areas as well, and I think that will contribute overall to improvements there. On YouTube, there are many, many areas we are focused on YouTube. They're always very focused on making sure they are supporting emerging formats, be it mobile live streaming or emerging formats like VR, and so that's an area of focus for us. We are also really looking at what are all-new monetization options for creators beyond advertising. So be it subscriptions, features like super chat, which we have launched, are very popular. We have beta testing sponsorships, merchandise, merchandising and concept, ticketing and et cetera, right? So these are all areas by which we are improving. And obviously, there are additional areas like Music and YouTube TV, which are seeing great momentum as well.

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Operator [16]
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And our next question comes from Ross Sandler of Barclays.

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Ross Adam Sandler, Barclays Bank PLC, Research Division - MD of Americas Equity Research and Senior Internet Analyst [17]
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Just 2 questions, please. Americas revenue accelerated nicely on a currency neutral basis. It's a geography that rarely comes up on your calls. So any color about what's driving that acceleration and the sustainability of what's going on in the Americas region? And then, Ruth, a question on sites TAC. So I know you said the pace of deleverage is going to start to improve next quarter. Is this something that we should expect to happen for a year and then kind of normalize back to pretty steady pace of deleverage? Or is this -- are we over some critical threshold, and we should see this trend of moderating deleverage continue for several years into the future?

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [18]
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So on your first question, other Americas. I would say, like the other regions, really pleased with the strength we have. Across the regions, it is obviously one of the smaller ones, so growing at a slightly faster clip and really pleased with the broad strength there. It starts with the sites revenue strength. But on top of that, they benefited from hardware devices launching in some additional markets over the past year. And then in terms of TAC, I would say there's not much to add to what we've already said after some -- a kind of sustained period of stronger increases. We were pleased last quarter to be able to signal that this quarter that pace of change is slowing, and just leave it at that for now.

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Operator [19]
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And our next question comes from Anthony DiClemente of Evercore.

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Anthony Joseph DiClemente, Evercore ISI, Research Division - Senior MD [20]
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I have 2, one for Ruth and one for Sundar. Ruth, on CapEx, even if we exclude the Chelsea Market one-timer, the gross in CapEx, is it really substantial even on a kind of recurring basis. Should we expect that sort of dramatic growth or step-up in the growth of rate in ongoing CapEx to continue throughout the year? Or other than the Chelsea Market one-timer, were there any -- do we have any reason to think that it was timing in terms of the timing, front-end weighted, it's the first quarter for CapEx? And then secondly on -- Sundar, just a question on YouTube and your media strategy at a higher level. In view of the success of other competitive subscription TV products out there, Internet video products, can you just talk about YouTube Red and any thoughts on ways you can accelerate growth for your YouTube subscription video products, whether that may be organic investment and content original production or even via acquisition?

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [21]
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So in terms of CapEx, it's about equally split between facilities and our technical infrastructure. And as you know that we have the $2.4 billion purchase in New York as well as discontinued ground-up development projects. Facilities does tend to be lumpier over time. We are continuing with the ground-up development projects. And as a reminder, we do favor owning rather than leasing real estate when we see good opportunities, and that has served us well over the years. But I think more to your question with respect to technical infrastructure, that reflects investments in compute power to support growth that we see across Google, and the largest component is on machines. It's also on data centers and undersea cables. And on machines, the biggest contributor is the demand that we're seeing. So in particular, it's the expanding application of the machine learning efforts across Alphabet, plus the requirements for cloud and Search and YouTube, and then secondarily, the increased cost of newer technologies, CPUs, memory, network. So I think, really, to answer your question most directly, it reflects the demand that we're seeing, so I wouldn't want to suggest a one-off in terms of the investments we're making in technical infrastructure. And then in terms of the data centers, we are investing globally. We currently have over 20 sites on 4 continents, and that's under different stages of construction, as Sundar noted. And it's across the U.S. Tennessee, Alabama, South Carolina, Iowa. So we're really building out to support the growth that we're seeing.

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [22]
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Sorry, on the second question on YouTube, for sure, the adoption and feedback across both YouTube Red and YouTube Music has been great to see. We are doing a lot more work there. You will see us continue to invest further and develop those offerings better, and as part of that, further drive adoption. So for example, YouTube Originals end up playing a big part in YouTube Red subscriptions. And so far, we have launched in a handful of markets, and we'll continue to roll it out to more markets there. And on YouTube Music, we are working on enhancing the product, and I think this definitely create opportunities there as well.

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Operator [23]
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And our next question comes from Dan Salmon of BMO Capital Markets.

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Daniel Salmon, BMO Capital Markets Equity Research - Media and Internet Analyst [24]
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Sundar, I had 2 for you. First, during the quarter, where there were some reports of changes in leadership that your Search and AI divisions functionally sounds like separating leadership over those 2 very large, important businesses for the company. Could you talk a little bit more about that and how that may impact broader strategy for the company? And then second, a little bit more technical one on your advertising business you launched, shopping actions during the quarter with a pay-per-sale model, pricing model. And I was just curious to hear what type of feedback you were getting from advertisers that led to a product with that pricing model in particular, any other features of shopping actions that you think are important to highlight.

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [25]
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Thanks, Dan. On the -- we obviously -- Search has been leading the company in terms of how they have been adopting machine learning and AI, and it's really working well through Search and Assistant. We sense that, obviously, as an AI-first company, AI cuts across everything we do in Google. And so as an organization, it's a horizontal organization, which needs to serve all our areas and in some ways, the change reflects that. And we have very capable leaders. Jeff, who runs -- was the Founder of Google Brain and really well positioned to lead our AI efforts. And Ben has been at Google since the early days of Search, started in Google in 2000 and has been driving Search for over 18 years. And so we are very excited, and we think the changes will serve the company well. On your second thing, the question was on shopping actions?

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Daniel Salmon, BMO Capital Markets Equity Research - Media and Internet Analyst [26]
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And in particular, the price per sale pricing model.

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [27]
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Oh, so I think we announced the -- this new service in March, and the feedback has been very positive. I mentioned earlier, which is for retailers, when they are testing this, they see it drives an increase in basket size. So that means users are interacting with the product well, and that's all I have to share for now. It's still early days.

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Operator [28]
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And our next question comes from Colin Sebastian of Robert Baird.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]
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A couple for me, please. First, on the cloud business. I was wondering if you could provide any color, at least in the relative momentum you're seeing in that segment from infrastructure services compared to platform or software services. And then related to the adoption of AMP. I guess, a key question we get asked is whether that ultimately changes usage, and maybe you have some perspective on this from Android. But in the ecosystem between mobile web pages and app usage, if you're seeing any shift among users between those formats.

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [30]
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On the first question of cloud, look, I mean, I think the main thing I would say is the fundamental drivers of adoption of Google Cloud based on what we hear back from customers is our advantage in data analytics and machine learning. The fact that we really support open, agile development environment. Kubernetes has literally become the standard for workloads and the fact that we are open in terms of how we approach this space. Security is becoming a big differentiator for us and something we've been leading for a while, and I think that's driving it. G Suite, as I called out earlier, is a good synergistic driver. G Suite is doing well, and clearly, a very unique offering, and it's gotten very comprehensive. And so I think overall, it comes together well. On your second question around AMP, AMP has been definitely very successful. It's really made publisher content much more friendly for users in terms of latency and the user experience, and hence, that option has been great. For sure, AMP has definitely helped the mobile web, and that's part of the big reasons we did it. Mobile web is still a big part of how users consume content, especially around news, and so us investing there clearly makes a difference. I guess, for example, when we look at, I don't know, J.Crew adopted AMP, their mobile page loading times are now over 90% faster. And now they are integrating the Google payment request API. That reduces checkout times from 2 minutes to 30 seconds or so. So things like that. We are going to constantly stay on improving the mobile web, and that plays a big part in how our ecosystem works.

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Operator [31]
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And our next question comes from Michael Nathanson of MoffettNathanson.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [32]
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I have 2, one for Sundar, one for Ruth. First, Sundar, can you give us any sense of how Google Home consumers are using Search in these devices differently than maybe the traditional ways of Search? And you're finding in those homes, is it additive to overall search activity? And then for Ruth, if you look at the last page of press release, where you've shown the new monetization metrics, you see a real increase in the cost per impression on network sites. So can you talk about maybe what's happening there? Is there a mix shift types of publishers, types of products? Or is that just market inflation?

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [33]
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Look, for sure, Google Home gives rise to a lot of new and unique use cases, actions that are a big part of it. Call mom is a good example of something you say to Google Home a lot. I can -- which is different than what you would say to Search. We see this as a good complementary thing. You will see Search embrace some of the capabilities you find in Google Assistant and Google Home and vice versa. And so overall, I view this as additive in the long term, and we are definitely just getting started there.

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [34]
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And then on the network monetization trends. First, just to give people a bit more color. When we launched the AdSense businesses, our network revenues were largely click-based. And over time, there's been a meaningful mix change in our business given the strong growth in programmatic, which is impression-based. So as a result, the shift now covers more of the business. And then in terms of the question on impression growth versus CPM growth, as we've discussed on prior calls, the network business is actually a number of different businesses. And then within that, we have flat year-on-year growth in the number of impressions that was driven by efforts to improve user experience through a reduction of less relevant ads and AFC. And so these changes had a positive impact on the year-on-year growth in CPMs. And then the trend and impressions in CPMs can clearly be volatile from quarter-to-quarter as we're optimizing for the user publisher and advertiser, but it really goes to the efforts that we make.

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Operator [35]
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And our next question comes from Brent Thill of Jefferies.

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Brent John Thill, Jefferies LLC, Research Division - Equity Analyst [36]
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Just as a question regarding any changes on your framework for growth versus operating margins. The last few quarters, you've seen steady top line acceleration, yet the margins were down. Can you just talk about how you think about it at a high level for this year? Any changes from the past?

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [37]
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Yes, it's an important question. As we've talked about on many, many calls, we have been and remain focused on supporting long-term revenue and profit growth, and we think the opportunity set ahead of us is quite extraordinary. And as I said in opening comments, just given our confidence and as we're looking forward, we want to make sure we're investing appropriately in the next phase of innovation, and we have clarity about some very compelling opportunities. And then our judgment, that enables us to maximize shareholder value. So we're taking the steps really to put in place the support for long-term -- longer-term growth. Part of what I'm saying, you can see in our sites revenue growth, try to make that clear in opening comments, we see this consistent, strong momentum globally, and we're really excited about the still sizable opportunity led by mobile search. And so we're continuing to invest to enhance the user and advertiser experience, and thereby, extend the growth in our ads business. You can see this also in the trend on the CapEx spend. As I noted in our opening comments, the investments we're making there really provide the compute capacity to support our growth outlook, and that's supporting the opportunities that come out of machine learning and the Assistant. And then we also see extraordinary upside in the newer markets, as Sundar has talked about, most notably cloud computing and hardware. And so we're investing to support the long-term growth opportunity there. And then finally, when we look at the market opportunity in both self-driving cars and life sciences, our judgment is it makes sense to place the kinds of investments that we are. And with all of this, what also hasn't changed is we appreciate the importance of prioritization and picking our spots, and we're keenly focused on steps we can take to both make the right investments with the proper intensity while being diligent about long-term plans and returns. So at a high level, the approach hasn't changed. You're seeing the investments here.

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Operator [38]
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And our final question comes from the line of Stephen Ju of Crédit Suisse.

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Stephen D. Ju, Crédit Suisse AG, Research Division - Director [39]
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So Sundar, I think one of the themes that you as a management team has talked about has been to, I guess, democratize advertising with AI to help SMBs who may have found advertising across Google's ad products to be perhaps overwhelming. So can you talk about the rate of uptake among the smaller advertisers and whether or not this is helping to catalyze growth in new budgets and where these guys might otherwise have not been able to advertise before? There's SMBs and then there's local also. So what will be the plan to get this technology into the hands of folks who will want to use them?

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Sundar Pichai, Alphabet Inc. - Director & CEO of Google [40]
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Look, I mean, there's a big focus for us. And today, SMBs are -- play a big role in our ecosystem, and we are doing a lot of stuff to support them across the board, right, and from things like in our offerings to help SMBs get an online presence, create a website, be discovered in local, search and Google Maps. So we do a lot of detailed work to make sure SMBs are working well. We are also doing a lot of stuff on local as well, including efforts that are even around local services. So we have very specific initiatives. This is going to be -- I mean, it's actually -- to us, it's bread and butter of what we do here, and so there's a lot of effort underway, not to mention the fact that we provide G Suite for businesses as they scale up as well. So it's an end-to-end offering, and we'll -- you'll continue to see us invest more here.

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Operator [41]
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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.

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Ellen West, - [42]
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Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter call.

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Operator [43]
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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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