Alphabet Inc (GOOGL)

• Google Cloud's operating margins have expanded to 17%, reflecting significant improvement due to scaling and efficiency efforts, positioning it for continued growth and profitability. -
• YouTube Shorts watch time continues to grow, with over 70 billion Shorts watched every day, and monetization rates improving, narrowing the gap with instream ads, which is attracting advertisers. -
• Waymo is scaling rapidly, expanding to new cities like LA, Austin, and Atlanta, with positive consumer adoption and strategic partnerships, such as with Uber, accelerating growth opportunities. -

• Increasing Capital Expenditures (CapEx) may pressure margins and free cash flow: Alphabet expects CapEx to increase in 2025 due to substantial investments in technical infrastructure, such as servers (including TPUs and GPUs), data centers, and networking equipment. This could create headwinds associated with higher annual run rates, depreciation, and non-capitalized construction costs, potentially impacting profitability despite efficiency efforts. - -
• Legal challenges from the Department of Justice pose risks to core search business: Ongoing litigation with the DOJ could lead to the voiding of key search distribution agreements, such as the Apple ISA contract and Android pre-install contracts. If these are voided, Google may lose default search status on major platforms, potentially reducing search traffic and ad revenue. -
• Significant ongoing investments required in Google Cloud may limit margin expansion: While Google Cloud's operating margin has improved to 17%, the need for continuous investments in servers and infrastructure to meet customer demand could present headwinds to further margin expansion. These investments lead to increased costs in the form of depreciation and construction expenses, which may offset efficiency gains. -

1. DOJ Trial Impact on Search Contracts
   Q: How will DoJ trial affect search contracts with Apple, plans to mitigate?
   A: Sundar stated they plan to vigorously defend against the DoJ trial and any proposals impacting search contracts, emphasizing their success comes from innovation and user choice. Even if contracts change, their strong foundation and user preference will help maintain market share. -

2. Cloud Margins and Outlook
   Q: Can cloud margins match peers with 30% margins?
   A: Anat acknowledged cloud margins reached 17% this quarter, driven by scale and efficiency. While investments will continue, especially in AI infrastructure, they aim to drive further efficiencies to potentially match industry peers over time. -

3. CapEx Spending and TPUs
   Q: How do TPUs influence CapEx spending versus peers?
   A: Sundar explained owning TPUs provides best-in-class efficiency, positively influencing CapEx compared to peers. By investing in TPUs and GPUs and optimizing architecture, they manage CapEx while supporting AI growth. -

4. AI Search Products Driving Growth
   Q: Which AI search products will boost growth in next 2-3 years?
   A: Sundar highlighted innovations like Lens, AI overviews, and Gemini as key products expanding possibilities in search. He expects significant evolution in search over the next 12 months, driven by AI, leading to durable multiyear growth. -

5. Company-Wide Cost Efficiencies
   Q: Are there opportunities to improve margins further company-wide?
   A: Anat emphasized ongoing efforts to drive efficiencies across the organization, including simplifying operations and using AI in processes. These efforts aim to offset increased investments, particularly in capital expenditures for AI infrastructure. -

6. AI Overviews User Engagement and Monetization
   Q: How are AI overviews performing and monetizing?
   A: Sundar noted strong user engagement with AI overviews, increasing overall search usage and satisfaction. Philipp added that monetization of AI overviews is approximately at the same rate as traditional search, providing a solid base for future innovation. -

7. Waymo Expansion and Learnings
   Q: What are the learnings from Waymo's city expansions?
   A: Sundar shared positive consumer adoption in Phoenix and San Francisco, with users appreciating safety and reliability. They are accelerating expansion to more cities, testing various models, and focusing on scaling for 2025 and beyond. -

8. YouTube Monetization Trends
   Q: How are YouTube consumption and monetization evolving between long-form and Shorts?
   A: Philipp reported Shorts watch time continues to grow, with over 70 billion Shorts viewed daily. Monetization rates for Shorts are growing robustly, narrowing the gap with in-stream videos, especially in high-monetizing markets like the U.S.. -

9. Google Cloud Customers' Gen AI Adoption
   Q: Are sales cycles accelerating with Gen AI adoption in Cloud?
   A: Sundar observed customers leaning into AI, seeing tangible ROI and bottom-line impact. As organizations understand more, they are adopting AI faster, setting up Google Cloud well for continued momentum into 2025. -

10. Advertisers Using PMax for Upper Funnel
    Q: Are advertisers adopting PMax for mid and upper funnel campaigns?
    A: Philipp confirmed Performance Max is seeing success across advertisers for various marketing objectives, including mid and upper funnel campaigns. Demand Gen is also effective in inspiring consumers beyond initial awareness. -

11. Organizational Changes for AI Innovation
    Q: How has Alphabet changed to advance AI innovation?
    A: Sundar explained they've restructured to form new "synapses" that adapt better to AI opportunities. This includes enabling teams to consume model innovation effectively and move faster, setting up well for the year ahead. -

12. Gemini Usage Milestones
    Q: How does Gemini usage compare to ChatGPT's users?
    A: Sundar shared Gemini serves over 1 billion users across products like search and Assistant on Android. They see strong momentum, with API volume increasing 14x in six months, but specific user comparisons to ChatGPT were not provided. -

13. Search Strategy: Separate Products vs. Integrated
    Q: Why not have separate agent and traditional search engines?
    A: Sundar believes integrating new capabilities into search is better than having separate products. User behavior is evolving, and they aim to anticipate and stay ahead by naturally incorporating innovations into search. -

14. Consumer Environment Trends
    Q: Insights on consumer health and trends in Q4?
    A: Philipp observed broad-based strength across all verticals, with growth led by financial services and retail. There was a slight tailwind from election-related ad spend, more pronounced in YouTube ads. -

Quarterly guidance for Q4 2024:

• Revenue Growth: Continued impact on advertising revenue growth due to strong performance in the second half of 2023, with subscription and devices headwinds - (no prior guidance)
• Expenses: Increase due to depreciation and investments in technical infrastructure, with a slight benefit from cost revenue associated with devices - (no prior guidance)
• Capital Expenditures (CapEx): $13B - - (raised from at or above $12B - )
• Cost Structure and Efficiency: Focus on optimizing headcount growth, physical footprint, and improving efficiencies in technical infrastructure - (no prior guidance)