Google today reported fourth-quarter results for 2017 followed by an analyst conference call with company CEO Sundar Pichai and CFO Ruth Porat on the phone Meeting, introduced the company's fourth quarter business and financial position, and answered questions on the spot.
The following is a summary of the conference call Q & A section:
Eric Sheridan, UBS Analyst: Sandal, From your blog posts by your employees, you've been very successful at CES with Google Home and Google Assistant and can talk about your cooperation in this area The key investment? Or what are your hardware or functionality goals over the next two years to ensure that the momentum around Assistant continues?
The second question, I would like to ask Ruth. The cost of goods sold in the fourth quarter was higher than we had expected, which we speculated probably because some one-time costs were added this year compared to the same period last year. Please talk about the pressure on the cost of goods sold, both on a seasonal basis and at a new level.
Picazzi: With Google Assistant and Google Home, we're very excited about the momentum we've seen at CES. It actually reflects the work we've done since this time. Google Assistant, to some extent, brings together the technology we have developed over the years, an extension that is also backed by Google Search.
We're also thinking about our capabilities in a much broader sense than just one device, which is what we're doing on the phone and on all other screens right now. This is the focus of our attention. Second, we've been building ecosystems, be it Android, Chrome or Chromebook. We work with many, many partners to scale up. So we'll take advantage of these best practices and try to build the system in a way that allows the entire ecosystem to integrate Google Assistant into a wide range of products and generate value. So, I think this framework is great, long term, and our investment in artificial intelligence will demonstrate its capabilities directly to users through Google Assistant. So, I am very optimistic about it.
Borat: Gross margin clearly reflects our product mix. As you are aware, the TAC rates for each site's network are a percentage of revenue, which is growing as they are our strongest growth areas, namely mobile search and programming ads, so they have a higher TAC. However, as I said earlier, we do estimate that YoY growth of TAC ratios at various websites will slow down after the first quarter of 2018. Another notable thing to note is that other revenue costs do reflect the seasonal nature of the hardware business, the number of products and the number of products made by Google have increased, and continue to expand in Western Europe and Asia Pacific, you can see that It is reflected here.
Heather Bellini, Goldman Sachs analyst: Ruth, did you just mention a partnership agreement that talks about how these things generally happen? I mean, is this often a multi-year deal? What impact will this have on the TAC ratio? Because you just talked about TAC growth rate, if these transactions are many years, then talk about the impact of the second year of it.
Secondly, I would also like to talk about what we saw at CES. What do you think of speech technology? Given the large number of voice devices that have emerged on the market today, what are the traffic acquisition strategies for these devices over the next five years? Do we have reason to think that when you look to the future, these strategies may be somewhat different from the strategies we have seen before? For example compared with the iPhone when it started to appear.
Borat: As for your first question, I do not have much to add. My point is that given the continuing momentum in our mobile search business, it still makes sense as you look ahead because of the higher TAC of mobile operators. However, as you asked, this TAC ratio also reflects changes and partnership agreements. Therefore, considering all the factors, we expect TAC's YOY growth to slow down after the first quarter of 2018. As I said in a previous conference call, we are very pleased to have a very strong position in the fast-growing market and that momentum will continue. I think the only thing worth mentioning is that TAC's revenue percentage in the fourth quarter did benefit from the quarterly quarterly YouTube strong season. Therefore, there is not much change in quarterly mom because CAC is different from TAC. It is not in this data, but not much to say here.
Psyche: Voice technology makes us very excited. We obviously see it being heavily used in countries like India; it's actually an important part of common mobile search. Products like Google Assistant and Google Home do accelerate this trend. However, we do see more modalities. So, as you can see, we also announced a lot of smart displays at CES. And I think it will be an exciting trend. So we will go all out on this. In general, we want to serve our users when they need us, and we want to serve everyone. That's why we work across the entire ecosystem. We develop first-party equipment, we do business globally, and we promise to do better. So I think this will be an extension of how we looked for ways to provide search and service for everyone right from the start. In this regard, I did not see a big change.
Douglas Anmuth, JP Morgan Chase analyst: There was some big news earlier this week when Waymo and FCA agreed to deliver a large number of minivans to Waymo later this year. Ruth, can you talk about the specific plan for this business? And when you enter the operational and deployment phase, the economic model inside is like? Second, cash is now concentrated overseas, so it is easier to get cash overseas and can you talk about your cash plan? Obviously, you will increase the size of the repurchase, but this does not make sense for the company as a whole.
Borat: We really are still excited about the opportunities that Waymo faces and the continued progress we have made in many areas, especially in the taxi projects in Phoenix. We will test the taxi service in more states. We announced in November last year that Waymo's self-driving TAC has reached a significant milestone as the only company that owns a fleet of driverless vehicles on public roads that are fully self-driving. In the real world, we completed over 4 million miles of autopilot tests in seven states and 25 U.S. cities. We're still testing now, and I'm talking about autopilot tests, 100,000 miles a day, and we've had billions of miles of mock tests on private test sites. So, for your question, we'll continue to explore alternatives to a range of programs, including the Phoenix pilot project. Our pilot projects in Phoenix include taxi services, personal use vehicles, logistics, delivery and partnering with cities Help them solve the problem of public transport. In other words, our first commercial application is taxi service, which we will officially launch in 2018 and may be open to the public in Phoenix, allowing passengers to use the Waymo app to get an unattractive driver experience. So, we are very excited about this.
Then, in terms of cash, I think the main point is that our funding allocation framework has not changed. We have always focused on long-term investment. We have talked a lot about this issue in this conference call. Our framework has always been very consistent. First, the use of organic is an investment in many opportunities we have. Followed by the strategic. We are still actively involved in smaller M & A deals, especially small-scale mergers and acquisitions that support our cloud business and hardware. The deal we've just concluded with the acquisition of the HTC handset business is a good example. The third is capital expenditure. As a result, we continue to invest in a variety of devices to support the growth of all of our businesses, especially cloud, search, YouTube, and everything we do in machine learning. Then eventually lead to a return on capital. When we think about it all, the board extends the share repurchase program we announced two years ago. We'll let you decide what that number represents in Google's real-world model. But this is only a modest increase in the hard work we have been doing before.
Morgan Stanley analyst Brian Nowak: Ruth, you talked about desktop search just now, and I think this is the second straight quarter of the business to remain relatively strong. Can you talk about desktop drivers that keep strong search? How do you think about the sustainability of desktop search's strong growth in 2018 and beyond? The second question is about the search query volume. People are often confused about how consumer behavior in the field of e-commerce will change, and also wonder if Google still has access to a lot of e-commerce search traffic. Can you talk about the retail search queries you see in the U.S. e-commerce space and search for user growth?
Psyche: In general, we think the search is very extensive. Even when you talk about the commercial market, we serve many market segments, including travel, hotels, services, products, and more. So, our service is very comprehensive. Obviously, e-commerce is still evolving and we will continue investing here. Google Shopping has grown very well, and we work hard to ensure that we deliver the best experience, which is why I say they are also search and assistant, for example we work with companies like Wal-Mart to make shopping easier. So we have invested a lot here. You're right, consumer behavior is changing, but given the breadth of our work and our focus on the user experience, we're not at all worried.
Borat: There's really nothing to say about desktop search. That's why I tried the whole process of our team's experience last season, experiencing the way they look at innovation and realizing that the way we use smartphones and desktops will continue to evolve. As a result, there are practical and challenging assumptions about evolving user behavior and advertiser preferences that open up new lookup routes that are not only good for the move, but equally beneficial for the desktop. The desktop has indeed brought considerable revenue growth. It is still an important element of some of the more complex tasks such as planning holidays or assessing insurance. We are satisfied with the current strong growth of this business. Forecast work is left for you to do. But we think it is another valuable factor and we are very satisfied with the performance of this business.
BMO Capital Markets analyst Dan Salmon: Sandal, I want to ask Europe's business. First of all, I would like to hear your thoughts on the potential impact of GDPR (General Data Protection Regulations), including the impact on your own websites and assets, and the possible adjustments that business management may need to make. It also has implications for the various customer matching tools that advertisers may use. Second, what is the latest progress in your dialogue with EU officials and regulators?
Picaz: I was still excited last week in Europe and Europe. I clearly feel that the European business is full of vitality. We are very concerned about this area. We are opening a new office in Europe, announced the establishment of AI R & D center, we are committed to hire more engineers and customer service staff. So, Europe is an important market for us.
We've been thinking about getting involved in things like GDPR. I think it is important for European citizens to keep privacy first, and we very much support the work being done in Europe. We promise to comply with GDPR across all services. We still have time to remind you that GDPR will not come into effect until May. We are working hard to make sure that all our products are ready. We will strive to achieve change. As for the European Commission, we have been engaged in a constructive dialogue. We understand their concerns and respond with prudent change, and we will continue to participate in a cautious manner.
Robert Baird analyst Colin Sebastian: Sandal, you are optimistic about the Google cloud. I wonder how much of this is related to machine learning as a service provider? Can you talk about how important this is to the overall cloud business? Secondly, I would like to ask a question about Google Home or voice assistant, from the trading point of view, the profitability of such products have changed? Trading model with retailer partners? Or do you see the advertising-based profit model coming out?
Pizzeria: With regard to the cloud, we clearly provided AutoML to Google Cloud Clients last quarter. To me, this shows how quickly we can promote internal progress. I remember that just a year ago our team showed me the first time that AutoML was talked about at Google Developers Conference Google I / O, which is a very cutting-edge work. And then made it available to everyone in the world, I think this shows the power we use when using Google Cloud, developing the most advanced technologies and delivering them to everyone.
I think the reason why such a strong momentum of growth is evident is that we have a great deal of power in machine learning. We also provide a secure, open, flexible development environment, followed by a G suite. But above all, I think we've been doing cloud computing all the time because Google itself is built on top of the cloud platform. However, this strong momentum of development has actually emerged in the past two years. We have made a lot of efforts to ensure that we are well prepared for the enterprises. So now we can deal with any type of business, any type of regulatory challenges, security challenges. This is evident in the business success stories we have seen. So, we sign a lot of large customers around the world. This, in my opinion, has contributed significantly to the strong growth of this trend.
There are many interesting ideas in-house about the profitability of Google Home and Voice Assistant. Therefore, the relevant team is happy to try something new. We see a lot of potential. But my guidance to them is that we must fully concentrate on the user experience. We really want to start. I think these technologies will become powerful technologies. However, we apparently think we can not do well in all areas to satisfy our users and achieve their expectations. So, you will see that we are focused on the user experience for some time to come.
Ken Sena, a Wells Fargo analyst: Search seems to be more eligible to travel to filter the prices, places, amenities and more that people want to pay. To some extent, is there any trend that will cause the search volume growth to slow down as the filtering scope increases? Second, are higher qualification trends relevant to the project and other aspects that may be involved or to our discussion around the TAC? What is the difference between your efforts on Google Pay and those you've done before?
Psyche: I'm not sure I understood all the details. But at a higher level, when people travel, like when they're on a trip, I think search is more valuable than ever. Everything we do when we search locally is perfect for travel, and we have products like Google Maps. So, overall, I think they together make up a better user experience and therefore create a great opportunity for us. Google payment is an important part of all this. The ability to complete a transaction is an important part of our journey as we move from just providing answers to helping users do the same, which is why ensuring Google Pay is as seamless as possible is an important part of our long-term strategy.
Credit Suisse analyst Stephen Ju: Ruth said earlier that the hardware business has made the biggest contribution to other revenue initiatives in the fourth quarter. Looking to the roadmap for the future, you've got HTC engineers and merged them into your internal team. So, this is the first time for you to have a hardware and software integration team. So will your product development speed and strategy on smartphones and other devices change in the future? And is it more meaningful to integrate the Nest team more closely into the Google Core team?
Pizzeria: You're right, and part of the reason we're excited about bringing this world-class team inside the company is that although we've been working together, we had to work together before the barriers of a company to work together, but for now, They became official Google employees, we can truly integrated development, which is very important for us to do a better job. We have brought a unique way of working for hardware: artificial intelligence, a combination of software and hardware. So I think getting these teams to work together will really speed up. The best example is that you see tremendous progress in taking pictures and videos of your phone. Nest team and Google hardware team are very closely linked. They work hard to achieve synergy. We have announced a lot of moves into the market. We will be more and more cooperation in product development. So, we work closely together, and I am also very excited about the possibilities here.
Merrill Lynch analyst Justin Post: In addition to coverage or advertising model, I feel this year the search business did not show any significant changes. I would like to invite you to talk about your thoughts on search innovation in 2018 and the key growth engine of the future. Ruth, you made a lot of comments earlier on investments in mid-term performance growth, offices, data centers and other areas. I wonder if you think 2018 is an investment year? Or as we have seen in the past two years?
Psyche: On the search, I suggest that you consider the issue this way: Imagine it as the user's journey. So many of the innovations we've done are not just for a single query and how we respond, but how we think about what the user wants to accomplish with a series of queries. Are you planning a trip? How can we make your plan better? Do you want to know more about a health-related area? How can we help you complete this understanding? So instead of just changing a particular pattern, it does better understand the context, providing you with information on a trip. I think there are many innovations in this direction. As I said before, this is more than just an answer, how do you help them get the information and take action? So, maybe you found something, you want to call that place, maybe you want to set a birthday gift, we want you to go further and help you buy a gift. Therefore, this is a matter of course. Innovation is happening in an integrated way in search and assistants.
Borat: As for your proposed investment, we have been investing in all of Alphabet's businesses and projects, and we have tried to define the priorities of our investments, all of which are intended to support healthy and long-term growth. Back to the company's founding purposes above. Year-over-year growth you saw, including these ongoing investments in all areas, has been reported by Sandar and I have increased by 22% over the previous year. Obviously, the quarterly growth is more volatile. We will continue to focus on doing the right things to support business growth. The fourth quarter did reflect a clear seasonal impact. Again, we will continue to look at various needs that can be varied, trying and prioritizing matters that will ensure our long-term growth.
Ben Schachter, Macquarie analyst: Can you talk about the evolution of Waymo's business model? You launched a Taxi service in Phoenix, and you and the manufacturer have partnered. You talked about other modes. However, from five years to ten years, what is the main business model? In addition, the strategic point of view can talk about the video game business What are the interesting? You've got some key talent in the field, and I wonder what kind of innovation you think Google will bring to the industry?
Borat: There's really nothing to add to Waymo. Years of technical work has been focused on safety and development of technologies and platforms, and we are satisfied with the results of these years. Now we have the opportunity to benefit people from the technologies we have developed. So, I think security is a key driver and many cities have exciting opportunities, which means optimizing the resource base that they have. So now it's still at a very early stage, and we're satisfied with all the team's progress, but we have a long way to go.
Picajai: As for the video game business, we have the YouTube platform, Google Play, and we have a lot of growth momentum in these areas. These assets are working well and we will continue to invest. But for the moment, we have nothing to share with you.