Ladies and gentlemen, thank you for standing by. And welcome to the Alphabet First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Thank you, Candice. Good afternoon, everyone, and welcome to Alphabet’s first quarter 2020 earnings conference call. With us today are Sundar Pichai and Ruth Porat.

Thank you, Jim, and good afternoon, everyone. When I last spoke with you in early February, no one could have imagined how much the world would change and how suddenly. Our thoughts are with everyone who has been impacted by COVID-19, especially those who have lost loved ones or their livelihoods. It’s a challenging moment for the world. Through it all, we are incredibly grateful for all of the essential workers on the frontline of this crisis. From healthcare workers and first responders, to grocery store clerks, delivery workers, teachers grappling with new technology to help children learn remotely, to all the scientists and researchers working hard to develop vaccines and treatments, and many others who are leading through these difficult times. Thank you. These people fill us with hope and show us the power of human resilience. We’ll need that energy and resolve in the months and years ahead. Today, there is still a great deal of uncertainty regarding the path to recovery. But there are some things that we can understand better with the patterns we are seeing. For example, it’s clear from data that people are being more cautious and are seeking authoritative advice and guidance to protect their family’s health and safety. A return to normal economic activity depends on how effectively societies manage the spread of the virus. There is no one-size-fits-all, and the timing and pace of recovery will vary from location to location. This is a long-term effort. It’s also clear that this is the first major pandemic taking place in a digital world. Many parts of the economy are also able to continue with some semblance of normalcy, thanks to advances in remote work, online shopping, delivery options, home entertainment, and telemedicine. At the same time, newer technologies like AI, Bluetooth exposure notifications, and 3D printing are being used to help fight the disease head on.

Thanks, Sundar. Our results for the first quarter are a tale of two quarters with strong results across our revenue lines for January and February followed by an abrupt decline in March in our advertising revenues, as governments globally instituted stay-at-home orders in response to COVID-19. At the same time, even through March, our non-advertising revenue lines maintained their strong performance, particularly Google Cloud. I’ll provide more details on the impact of the crisis as I review the Google segment revenue results and conclude with an update to the outlook that I shared on our fourth quarter call. Sundar and I will then take your questions.

Thank you. And our first question comes from Eric Sheridan from UBS. Your line is now open.

Thanks for taking the question and I hope all is safe and well with everyone on the team there at Alphabet. I have two questions if I can. One, on the comment with respect to direct response advertising on YouTube, I would love to get a little more color on how direct response advertising’s ad units continued to evolve and perform, and how advertisers are using those ad units as part of their broader advertising goals. And then maybe, Ruth, for you, on the comment on expenses, I just want to understand a little bit of how much of what your messaging on expenses is efficiency gains that you were aiming for in 2020 before we got to COVID-19 versus elements of the cost structure that you’re reexamining as a result of the pandemic. Thanks so much.

Eric, thanks for the wishes. On YouTube direct response, we’ve definitely seen traction there. I think an area where it really works well, for example, is app installs; it’s a great example of it. Gaming is another good example. We are working on iterating and making the format work better so that it applies to more contexts as well. But, in general, I think businesses are learning to adapt. Obviously, we’ve had great success with Search and so we’re bringing a lot of those learnings and we’re sharing it with our customers. So we expect to see more traction there over time.

And on your second question, I like the way you framed it. Yes, we do have efficiency efforts that we started, that we had going as we entered this year. But as a result of what we’re seeing in the environment, our view was that we should really double down on those. So, when we go through the various areas that I mentioned, we had started the year with an expectation about really optimizing headcount around the various areas. What we’ve determined is we’re going to, at this point, slow the pace of hiring. To be very clear, we are continuing to hire, but we are slowing the pace of hiring. That’s helping as we’re driving a deeper look into how to optimize within each area. The same is true, for example, in some of the comments on marketing. We are continuing to invest in marketing. As you know well, the sales and marketing line, the majority of it is headcount related, and we do continue to invest here in ads and, in particular, in Cloud. As it relates to the marketing component, namely ads and promo spend, we did reduce it relative to our plans in the beginning of the year. We continue to have a healthy budget for ads and promo, particularly in digital, to support many business areas. But as with the other areas of investment, we’re really focused on optimizing across products and services. And with physical events canceled for much of the year, marketing spend is also reduced. That’s another example. With machines and servers, we’ve been focused on efficiency of the fleet for some time now. This is giving us the opportunity to push that even further. We’re looking at the operating environment and saying we should continue to lean into the efficiency programs we can. This does help us free up some resources for the growth areas that continue to be a priority, but it is an accentuation of where we were.

Thanks so much.

Thank you. And our next question comes from Doug Anmuth from JPMorgan. Your line is now open.

Great. Thanks for taking the questions. One for Sundar, one for Ruth. First, Sundar, you just talked about how once the crisis has passed, the world will not look the same. I’m curious if you can just elaborate a little more on how you think Alphabet comes out stronger on the other side of this downturn. And then, Ruth, maybe taking the question on expenses a little bit further, did this give you any more opportunity to be even more disciplined or diligent on costs on the other side as well? Thank you.

Thanks, Doug. It’s a good question. We are thinking deeply about it as well. In general, I would say the highest level opportunity is, across everywhere we see, businesses thinking deeper about the shift to digital. That’s true across marketing, cloud, in every place we see that trend. Part of this is making sure our investments deliver value with respect to that shift. If you look at advertising, people who in the past may have debated things like how do I get virtual showrooming, now are really thinking about it. People who may have been hesitant to shift their budgets are looking through moments like this and trying to get all that working better. Cloud is an obvious area; every company has been thinking about digital transformation. But they are asking the questions deeper. For example, if you have data centers, there are fixed costs through something like this. You learn going through a moment like that and you’re thinking about the opportunity harder. Across everything we do, be it Search, be it YouTube, be it Play, be it Cloud, I think we are investing to capitalize on this long-term opportunity. Overall, when you look at investments like Waymo and Wing, you can imagine in the future these things working well and playing a significant role. Even in the limited area, we clearly saw its potential through a moment like this, so we’re betting on those big trends.

In response to your other question, if I understand it correctly, you’re asking about the durability of some of the efficiency efforts. After a decade of growth, there have to be opportunities for added efficiency. We’ve been focused on that for some time. Painful times like this put a spotlight on an urgency around making sure you’re focused on the levers that you have. Those instill the right kinds of health metrics against which you’re managing. So I would say that the intent most certainly is that these are durable investments to ensure that we’re operating as effectively and efficiently as we can be. I just need to reiterate, Sundar and I have both said this: we remain committed to investing for the long term, so we’re not compromising where we need to invest for long-term growth. We’re trying to make sure that each dollar of investment is well managed.

Thank you, both.

Thank you. And our next question comes from Heather Bellini from Goldman Sachs. Your line is now open.

Great. Thank you so much for taking the question. Ruth, I have two questions for you actually. First, I wanted to thank you for the color around the growth you’re seeing as you were exiting the quarter in the ad business. There have been some signs from different partners or different companies that ad spending, while down considerably, has actually improved a little bit, maybe some green shoots from the declines you might have been referencing at the end of March. Any chance you can give us a sense of the type of growth you’ve been seeing for the first 3, 4 weeks for the quarter, just to help level set us? And then, just in regards to the provision you mentioned in G&A related to credit deterioration, is there a chance you could tell us the amount of that provision? Do you expect to have to do this again in the second quarter? Thank you.

Thank you for the – so, in terms of ads revenue, as I said in opening comments, for our ads business, a key signal to monitor is macroeconomic performance, which has tended to be correlated with ad spend. It’s premature for me to comment on the trend. In terms of what we saw in the first quarter, for Search and other revenues, they were up 9% year-on-year for the quarter. But in March, revenues began to decline and then ended the month at a mid-teens percentage decline in year-on-year revenues. With YouTube, we had strong revenue growth until late in the quarter when trajectories for direct response and brand diverged. Direct response continues to have substantial growth throughout the quarter while brand began to experience a sizable headwind starting in mid-March. By the end of March, total YouTube ads revenue growth had decelerated to a year-on-year growth rate in the high-single digits. As for the second quarter so far, I think it’s premature to gauge, given uncertainty in the environment. A few weeks obviously is not a quarter. In such an unprecedented crisis, I would not want you to extrapolate from just a couple of weeks. The decline in our Search and other ads revenue was abrupt in March. Although we’re seeing some early signs at this point that users are returning to more commercial behavior, it’s not clear how durable or monetizable that will be. Based on our estimates from the end of March through last week for Search, we haven’t seen further deterioration in the percentage of year-on-year revenue declines. For YouTube, direct response has remained strong; however, we’ve seen a continued decline in brand advertising and it’s really too early to add more. A few weeks obviously is not a quarter, and given it is such an unprecedented environment, I would not extrapolate from these comments for the full quarter. And then I’m sorry you had the second question on the…

On the G&A, sorry, no, that was very helpful, so thank you on behalf of everybody. And then just the G&A that you mentioned the credit provisions that you said you took, I just was wondering if you could share the amount it might be in the queue later tonight, but wondering if you could share with us the amount on the call?

It will be in the queue later tonight.

Okay. Thank you.

Thank you. And our next question comes from Michael Nathanson from MoffettNathanson, your line is now open.

Thanks. I have one for Sundar and one for Ruth. Sundar, people have asked you about your priorities you talked about, but I wonder if you could step back and think about what this crisis will do to the other side and maybe a reorienting of your priorities, perhaps where you would shift spend in the long-term to take advantage of where this is going? And then Ruth, we appreciate the color on YouTube. Just want to dig in some more, if you can give us any sense of YouTube geographies—is there any difference by change by geography that is really helpful? So, thanks.

In terms of overall priorities, I would say we’ve always taken a long-term view to thinking through the arc of where things are going. Our deep focus on AI is an example of that, and we’ve been convinced for a while that those trends will play out in the long term. If anything, through moments like that, the strong foundation we have built allows us to continue to be able to invest in our long-term areas, so AI is a good example of it. The shift over time on computing to ambient computing is something we’re going to be deeply committed to and continue to invest there. Cloud and productivity software for businesses of all sizes is a deep area of investment, and so the thesis will remain. We continue to focus anywhere we think the actual work we are doing is based on deep technology, deep computing, and deep computational scale. Those are the investments we think still stand the test of time. Beyond that, we are actively looking at how user patterns are emerging. For example, e-commerce is an area, and you saw us respond through the changes we announced on our shopping property and going for comprehensiveness there. With new leaders in place, we’re going to ensure we work on the user experience there. We are looking at shifts, be it videoconferencing with Google Meet and G Suite, and adapting and investing in those areas as well. That’s how we are approaching it.

In terms of the geographic breakdown for YouTube, we bring that down. To give you a little more color, in mid-February revenue growth across the business began to decelerate in APAC, although as I noted, the decline in APAC was more muted just given the uneven impact of COVID and the nature of our business across the region. The impact in EMEA was first evident in mid-February and a steeper falloff occurred in March. In the second week of March, we then saw results in the U.S. and other Americas fall off shortly, but nothing more specific by product.

Okay. Thank you, Ruth.

Thank you. And our next question comes from Brian Nowak from Morgan Stanley. Your line is now open.

Thanks for taking my questions. I have two. The first one, Ruth, just to go back to your comments around the early signs of improvements in behavior and search. I know it’s early and don’t want to extrapolate, but just any more detail on the types of behavior you’re seeing, which verticals or categories or geographies are you seeing sort of the first signs of green shoots on the Search side? And then Sundar, just to go back to your comments about the shift toward digital opportunities or digital transformation, could you talk to us about, as you sort of look back over the last couple of years, what you’ve done on the SMB side and one or two of the key hurdles where you see you really need to invest and build more comprehensive SMB products for post recovery?

Maybe I can give color both on the SMB and a bit on that side too. On the SMB side, it’s an area we have been investing for a while. We have assets both across AdWords, Google Maps, Google My Business, and obviously providing them with G Suite and the tools to get their business running. I do think we have a lot of touch points, but the focus has been simplifying it, making it a more cohesive, easy experience, and ensuring it works well from mobile—creating a truly lighter-weight AdWords experience so that they can get onboard quicker and reducing their workload. Over time, we are bringing technologies like AI to just make it all much simpler and seamless for them. This is a continued focus for us, especially scaling this up to work internationally well. We have clear metrics and targets internally, and we are aligning the teams better to get there. You will see us do more. Regarding the ad side, to your question about providing qualitative color, the good thing about search ads and direct response on YouTube is that it’s an extraordinarily effective system. It’s a transparent system. You have a very clear sense of ROI; it’s very measurable, and highly cost-effective. We have always seen—and we saw this in 2008 as well—that people respond in the short term, but the recovery is also fast when it comes back. It is diversified both geographically and across different verticals. Even through moments like this, we do see businesses responding to demand shifts. For example, if people suddenly are looking for office furniture or even pajamas, the system responds. I mentioned earlier that people are really thinking about the shift to digital. Our ads team is super engaged with our customers helping them think through the opportunities through moments like this. I provided an example earlier: if you are thinking about cars and you’ve been hesitant to do virtual car showrooming, now is the time you’re beginning to have those conversations in a deeper way. There are budgets which are shifting; in certain cases, large customers may have spent a lot of money on live sports, which is clearly on hold, so they’re looking to shift some of those budgets into opportunities they see. Having said that, there are large sectors of the economy that are impacted. Things like travel—our large partners and customers are affected, and we clearly see the impact of that, which is the color Ruth provided as well.

We have had tremendous momentum on G Suite. Google products like Gmail and Google Docs are built from the ground up to really help people be productive and collaborative in a distributed work environment, so we’re clearly seeing traction there. Google Meet has seen great traction; I mentioned some user momentum there. We have more announcements coming up including later this week. Tremendous engagement on G Suite and Cloud— the shift to digital has been a deep trend, and if anything, people are really engaged on it. I previously talked about how if you’re a customer with data centers, those are fixed costs that you have when going through moments like this. Businesses are really looking for opportunities, but I want to acknowledge small businesses across the world are deeply impacted. As a company, we have announced several efforts to support small and medium businesses, and we are going to be deeply engaged with them. It’s going to be a tough journey for all of us, and we look forward to working with them to help.

Thank you. And our next question comes from Dan Salmon from BMO Capital Markets. Your line is now open.

Good afternoon, everyone. Thanks for taking the question. Sundar, I wanted to return to those long-term initiatives that you walked through earlier, particularly the changes announced this week for shopping. Could you explain a little bit more about the reasons for making those changes and expanding the free listings or creating free listings, and what drove you to make that decision now? And then a related follow-up for Ruth, essentially the same question. As we think about the financial impact of such a change, this may qualify as causing some variability in the quarter-to-quarter rate, but benefit all parties over the long term, how are you assessing it?

Going through a moment like this, it’s clear that part of what makes Google work well is the diverse range of needs people have, particularly in shopping. They spend time discovering products, and comprehensiveness really matters; that’s how we can create a great user experience. As we’ve considered this space, we’ve come to realize that to truly deliver that comprehensiveness and quality of experience, we need the widest catalog possible. We are skilled at ranking products and matching users to what they are looking for. It makes a lot of sense for us; looking through the range of experiences people seek due to the COVID pandemic only validates our approach. We are executing hard there with leadership in place. The opportunity to return to our first principles and improve comprehensiveness is one we are seizing. One of the tricky components of this involves ensuring that we don’t encounter spam and that we’re managing and delivering quality experiences. That’s where our deeper partnerships, in particular with PayPal and other providers, come in, to help us obtain quality signals and, ultimately, enhance experiences as we improve comprehensiveness. Both elements are going hand in hand. We have demonstrated that when we improve the organic experience, the advertising opportunity also presents itself, and our system works well together. I’m really excited about this change. Although it’s early, it’s been received positively, and you’ll see us deeply enhance the experience in this area. Along with shopping, another area we are investing in is Google Pay, for which we have great leadership. We’ve been executing well there over the past year, and the growth on Google Pay has been strong.

In terms of your question about the financial implications of this effort, I have nothing much to add here today; I would echo Sundar’s excitement about leading this effort. As Sundar mentioned, our priority is to create sustainable financial value. We have leadership with a proven track record of achieving that, so we’re excited about what’s being built here with the team.

Okay. Thank you both.

Thank you. And our next question comes from Justin Post from Bank of America. Your line is now open.

Great. I appreciated all the advertising updates in March. Just wondering, your cloud growth is obviously quite stable in the low 50s. Was there any impact in March on workloads or a slowdown in the new customer pipeline? And then Sundar, could you discuss what could be the benefit for cloud as we get to the other side of this, such as work from home or other secular changes in cloud that might result from this? Thank you.

Overall, on cloud, interest and momentum remain strong. We’re obviously making a lot of progress both across GCP and G Suite and we find our offerings are getting deeper, really helping customers from a broader perspective. The overall momentum is there. There are cases where even though the deal trajectory remains the same and we have wins, things are taking a bit longer as you would expect. Our customers are impacted during moments like this as well, so I would say time to closing some larger deals may be impacted. However, companies are all, if anything, thinking at a CEO level about the shift to digital in a deeper way, and that presents a longer-term trend we are excited about. Of course, consumption can get impacted depending on the sectors which companies are in. That has some correlation with the general underlying performance of that sector. We’ll have to wait to see how it develops. The teams are performing well, and we are committed to our long-term investment strategy.

You asked about Q2; I don’t have anything to highlight there. I’d just reiterate what Sundar mentioned: We’re very pleased with the Q1 performance of both GCP and G Suite. The dynamics that affect cloud are clearly different than those from ads. Just to build on Sundar’s comments regarding G Suite, during this work-from-home environment, we’re seeing significant interest from governments and companies looking for work-from-home solutions. For example, Cambridge Health Alliance is a U.S. health system with 140,000 patients, and they relied on G Suite to support their staff and caregivers during COVID-19, helping them connect across hospitals and health centers from home. It’s just another example of how we’re able to be present, helpful, and useful during this time.

Thank you.

Thank you. And our next question comes from Kevin Rippey from Evercore ISI. Your line is now open.

Hi, thanks for taking the question, guys. One for Sundar and then one for Ruth. Sundar, the question for you really relates to the resiliency you’re seeing within the direct response piece of YouTube. Are there specific factors, or is it a change in the mix of advertisers there that’s sustaining that growth? And then the question for Ruth is you highlighted that this has given you an opportunity to refocus on cost discipline. The capital returns, via stock repurchases, remain quite strong in the quarter. Has this affected your outlook on buybacks and capital returns going forward? Thanks.

In looking at the overall momentum for YouTube, we are seeing strong engagement; people are turning to YouTube. Our watch-time has significantly increased across the board. People are also looking for authoritative news content. Viewership on YouTube has increased significantly compared to last year or two. In many ways through the pandemic, people are using YouTube. The trends are global across North America, EMEA, and Asia Pacific as well. On direct response, I do think this is a journey; people who have been investing are seeing that it is cost-effective, and over time, more people are looking at it. Our sales teams are doing an excellent job of helping our customers understand the opportunities there, bringing all of that to bear. In the case of App Campaigns, we’ve made it easier for customers not to think about whether they’re trying to do this across Search or YouTube; we’re bringing them a simple holistic solution, impacting all of that effectively. I mentioned gaming earlier; when you consider things like unboxing and product reviews, those naturally align with direct response and payments as well. Earlier, I alluded to all the work we are doing on commerce. I look forward to those integrations coming into YouTube and improving, so those are some of the longer-term opportunities we are working to present in a significant way.

On capital returns, we believe a responsibly sized share repurchase program remains appropriate given the current environment. It aligns with our capital allocation framework and cash balance. At the beginning of the year, I had indicated that we expected to repurchase shares at a pace at least consistent with the fourth quarter on the remaining authorization, and that remains our view for the second quarter.

Thank you, and our final question comes from the line of Mark Mahaney from RBC. Your line is now open.

Okay, thanks. In terms of the modest trends you mentioned at the end, you noted this recovery or modest movement up in consumer commercial search queries. Have you also seen a small improvement in advertiser interest in running campaigns? I think you said both deteriorated in March. One of them came back; did the other come back too? Did you also see advertisers starting to return? Secondly, the YouTube result in the March quarter was phenomenally strong given what happened in the month of March. Was that a comp issue, or was the comparison much easier? It sounds like January and February could have been up strong, possibly 40% year-over-year. Could you provide any color? Was that just easy comps, or did something fundamentally change that led to such a material acceleration? Thank you.

As I tried to be clear in response to others’ questions, I wouldn’t extrapolate from my comments for the full quarter. It’s early; I’m just giving you an early read, and I really have nothing more to add than what I indicated.

To reiterate what was said earlier, Search tends to be more responsive; evolving quickly both up and down, while brand is a slower process and will lag behind. I think it’s worth keeping in mind. Overall, we see a vibrant system. Advertisers are definitely engaged and looking at it, with active conversations between our teams and large advertisers on how to respond to demand shifts. Overall, both from the user and advertiser sides, people are actively engaging with Google, YouTube, and our core products and services. While there’s an impact on the economy that we’re not immune to, the engagement with advertisers across our products and teams has been very robust.

Thank you, and that concludes our question-and-answer session for today. I’d like to turn the conference back to Jim Friedland for any closing remarks.

Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2020 call. Thank you and have a good evening.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect.