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

Q1 2019 Alphabet Inc Earnings Call
APRIL 29, 2019 / 8:30PM GMT

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

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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 - Analyst
* Ross Adam Sandler
Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst
* Justin Post
BofA Merrill Lynch, Research Division - MD
* 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 Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst
* 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 First Quarter 2019 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, Alphabet Inc. - VP of IR [2]
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Thank you. Good afternoon, everyone, and welcome to Alphabet's first Quarter 2019 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 regarding our business performance and operations and our expected level of capital expenditures may be considered forward looking, and such 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 most recent Form 10-K filed with the SEC.
During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor.
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. In the first quarter, total revenues of $36.3 billion were up 17% year-on-year and up 19% in constant currency following a strong 2018. Once again, our results were driven by ongoing strength in mobile search along with important contributions from YouTube followed by Cloud.
For today's call, I will begin with a review of results for the quarter on a consolidated basis for Alphabet focusing on year-over-year changes. I will then review results for Google followed by Other Bets and will include with our outlook. Sundar will then discuss business and product highlights, after which we will take your questions. Let me start with a summary of Alphabet's consolidated financial performance for the quarter.
Our total revenues of $36.3 billion reflect a negative currency impact year-over-year of $1.2 billion or $1 billion after the impact of our hedging program. With respect to Alphabet revenues by geography, U.S. revenues were $16.5 billion, up 17% year-over-year. EMEA revenues were $11.8 billion, up 13% year-over-year and up 16% in constant currency, reflecting weakening of the euro and the British pound. APAC revenues were $6.1 billion, up 27% versus last year and up 31% in constant currency, reflecting primarily the weakness of the Australian dollar and the Indian rupee. Other Americas revenues were $1.9 billion, up 10% year-over-year and up 21% in constant currency, reflecting primarily the weakening of the Brazilian real and Argentine peso.
Turning to profitability. In our earnings press release, we provide a table to highlight the impact of the European Commission fine on operating come, net income and EPS results in the first quarter. I will comment on results both with and without the impact of the fine as I review the results.
On a consolidated basis, total cost of revenues including TAC, which I will discuss in the Google segment results, was $16 billion, up 19% year-on-year. Other cost of revenues on a consolidated basis was $9.2 billion, up 27% year-over-year primarily driven by Google-related expenses. The biggest contributor was costs associated with our data centers and other operations, including depreciation, followed by content acquisition costs primarily for YouTube and mostly for our advertising-supported content but also for our newer subscription businesses, YouTube Premium and YouTube TV, which have higher CAC as a percentage of revenues.
Operating expenses, including the impact of the EC fine, were $13.7 billion. Excluding the impact of the fine, operating expenses were $12 billion, up 20% year-over-year. The biggest increase was in R&D expenses with headcount growth in Cloud as the largest driver. Growth in sales and marketing expenses primarily reflects additions to headcount. Growth in G&A expenses is primarily due to legal matters, including the effect of a legal settlement gain recorded in the first quarter of 2018.
Stock-based compensation totaled $2.8 billion. Headcount at the end of the quarter was 103,459, up 4,688 from last quarter. Consistent with prior quarters, the majority of new hires were engineers and product managers. In terms of product areas, the most sizable headcount increases were in Cloud for both technical and sales roles.
Operating income was $6.6 billion. Excluding the impact of the EC fine, operating income was $8.3 billion, up 9% versus last year for an operating margin of 23%. Other income and expense was $1.5 billion. As I trust most of you are aware, in 2018, this line item was meaningfully elevated because of the introduction of a new accounting standard that requires recognition of unrealized gains and losses on equity securities. We provide more detail on the line items within OI&E in our earnings press release.
Our effective tax rate was 18.3% for the first quarter reflecting a sizable impact from the nondeductibility of the EC fine. Net income was $6.7 billion, and earnings per diluted share were $9.50. Excluding the impact of the EC fine, net income was $8.3 billion and earnings per diluted share were $11.90.
Turning now to CapEx and operating cash flow. Cash CapEx for the quarter was $4.6 billion, which I will discuss in the Google segment results. Operating cash flow was $12 billion with free cash flow of $7.4 billion. We ended the quarter with cash and marketable securities of approximately $113 billion.
Let me now turn to our segment financial results. Starting with the Google segment. Revenues were $36.2 billion, up 17% year-over-year. In terms of the revenue detail, Google Sites revenues were $25.7 billion in the quarter, up 17% year-over-year. In terms of dollar growth, results were led again by mobile search with a strong contribution from YouTube followed by desktop search.
Network revenues were $5 billion, up 8% year-on-year, continuing to reflect the performance of the primary drivers of growth, AdMob, followed by Google Ad Manager. Other revenues for Google were $5.4 billion, up 25% year-over-year, fueled by Cloud and Play and partially offset by Hardware.
Google Cloud Platform remains one of the fastest growing businesses in Alphabet with strong customer momentum reflected in particular in demand for our compute and data analytics products. Strong growth in Play was driven particularly by performance in APAC. Hardware results reflect lower year-on-year sales of Pixel reflecting in part heavy promotional activity industry-wide given some of the recent pressures in the premium smartphone market. We provide monetization metrics in our earnings press release to give you a sense of the price and volume dynamics of our advertising businesses.
Total traffic acquisition costs were $6.9 billion or 22% of total advertising revenues and up 9% year-over-year. Total TAC, as a percentage of total advertising revenues, was down year-over-year reflecting a favorable revenue mix shift from network to sites as well as a decrease in the network TAC rate. The sites TAC rate was flat year-over-year as the impact of the ongoing shift to mobile, which carries higher TAC, was offset by the growth in TAC free sites revenue primarily from YouTube. In Q1, the network TAC rate declined year-on-year primarily due to a favorable product mix shift.
Google stock-based compensation totaled $2.6 billion for the quarter, up 13% year-over-year. Operating income was $9.3 billion, up 11% versus last year, and the operating margin was 25.8%. Accrued CapEx for the quarter was $4.5 billion, reflecting investments in data centers, servers and office facilities.
Let me now turn to and talk about Other Bets. Revenues were $170 million primarily generated by Fiber and Verily. Operating loss was $868 million. Other Bets accrued CapEx was $59 million. Key recent accomplishments include: Waymo recently announced that it will expand its activities in Michigan opening a facility in Detroit that will be the first factory dedicated to the production of L4 autonomous vehicles. Last week, there were exciting announcements from 2 additional Other Bets that were originally incubated within X. Loon announced a long-term strategic relationship to advance the use of high-altitude vehicles to deliver connectivity with SoftBank's telecoms growth, HAPSMobile, which will invest $125 million in Loon. Wing became the first drone delivery company to receive air carrier certification from the FAA, an important step toward beginning a commercial service delivering goods from local businesses to homes in the U.S.
Let me close with some observations on our priorities and longer-term outlook. As we highlighted on our last call, there was a significant swing year-over-year in the impact of currency movements on our results this quarter from a big tailwind in the first quarter of 2018 to a headwind in 2019. These affect both revenues and operating income given the majority of our expenses are in the U.S. Based on the continued strengthening of the U.S. dollar relative to key currencies, we expect a continued headwind to our revenues and operating income again in the second quarter.
In terms of our key revenue drivers, with respect to Sites revenues as we indicated last quarter, the timing of product changes in ads at times can have an impact on year-on-year growth rates. We will continue to make changes with a focus on the long-term best interest of users and advertisers. We remain confident about the sizable opportunity ahead to improve the advertiser and user experience through our ongoing commitment to product innovation, in particular by leveraging machine learning across our ads, products and properties.
Turning to the key drivers of growth in other revenues. We are pleased with the momentum of Google Cloud Platform with balanced growth of both new customers and expansion within existing customers driving revenue growth. With respect to Hardware results, while the first quarter results reflect pressures in the premium smartphone industry, we are pleased with the ongoing momentum for assistant-enabled Home devices, particularly the Home Hub and Mini devices, and look forward to our May 7 announcement at I/O from the Hardware team.
Turning to profitability. With regard to Google OpEx, the first quarter results once again reflect our ongoing commitment to investing for the long term. You can see that in R&D, where we continue to invest in technical talent for priority areas like cloud, search and machine learning.
In terms of sales and marketing, the pace of investment in Q1 reflected a timing shift in spend, and we expect these expenses to pick up in the second quarter. In Other Bets OpEx, we are still early in the life of these companies and do plan to continue to invest meaningfully for the long-term opportunity.
With respect to CapEx, the year-on-year decline reflects the purchase of a building in New York in the first quarter of 2018. As discussed on our call last quarter, while we anticipate that our full year CapEx investments will exceed those in 2018, the growth in investments should be at a meaningfully lower rate than in 2018. We continue to expect a sizable investment in both compute requirements to support long-term growth as well as in office facilities.
In conclusion, we feel confident about the opportunities ahead, and we continue to invest thoughtfully for the long term. I will now turn the call over to Sundar.

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Sundar Pichai, Google LLC - CEO [4]
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Thanks, Ruth. It's great to be here with you all. Q1 was a very busy quarter at Google, and it's only going to get busier. Later this week, we'll host YouTube's upfront event, Brandcast, followed by our annual developer conference, Google I/O, next week and our advertising summit, Google Marketing Live, later in the month. You'll hear a lot more from each of these teams throughout May, so I hope you can join us.
We've always been a company that's focused on the long term willing to make investments that will help our businesses and our customers' businesses succeed as technology continues to evolve. You saw this in the transition to mobile computing years ago, and we are seeing that today in the shift to AI. We feel very positive about the enormous opportunities ahead involving Search and Assistant, capturing new ad budgets, cloud computing, AI and other areas.
What gives us these opportunities is Google's position to help people, businesses and society in countless ways through our products. Today, I will start by talking about our core mission of making information universally accessible and useful. Then, I'll provide an update on our computing video and advertising platforms. And finally, I'll discuss our Hardware and Cloud efforts.
First, an update in our mission to make information accessible and useful is helping people every day. A big focus for us is building products that are designed to help people in their day-to-day lives. Our Duplex technology within Google Assistant can now help you easily book a table at your favorite restaurant on all Android and iOS devices in 44 U.S. states. Just tell the Assistant where you want to go and when, and it'll do the rest. We've also begun testing AR walking navigation in Google Maps, which uses augmented reality and your phone's camera to show you where you are relative to the surroundings as you're walking.
Just last week, we announced an improved job search experience in the U.S. that helps people easily discover quality remote jobs allowing them to work right from home. As part of our Google News initiative, we kicked off the Local Experiments Project working with local publishers to uncover new approaches to their business models and operations, so they can continue bringing great local content to their readers.
AI is now spurring a new era of computing, which is more predictive and more assistive. We are committed to doing deep research and working to advance this space in a responsible way. AI is deeply embedded in our products from Search to Photos to Google Home, and we are also expanding others' ability to build on our advancements.
Recently at TensorFlow's Annual Developer Summit, we announced TensorFlow 2.0, making it easier than ever to build and use ML through improvements like TensorFlow Privacy, which helps train models with differential privacy, meaning that users' data is better protected.
Now on to our computing, video on advertising platforms. There's tremendous momentum across the Android ecosystem and our other computing platforms as we head into Google I/O. In the first quarter, we released the beta of Android Q, which brings added privacy protections, new tools for developers to engage users and more. Android Go edition, an optimized version of Android tailored for smartphones with 1 gig or less, delivers a powerful fast and secure experience specifically optimized for entry-level smartphones. Today, roughly 70% of entry-level Android devices are now activating with Go like Samsung's J2 Core.
We are seeing great momentum in Android Auto as well. At the Chicago Auto Show, Toyota announced that it'll include Android Auto in upcoming vehicles starting in 2020. That means all of the top 10 carmakers now support Android Auto.
And in Google Play, first-time buyers grew by nearly 50% year-over-year. I'm very pleased with how these platforms are growing and creating amazing experiences for users, developers and partners. Our newest platform, Stadia, which revolutionizes the way gamers access and play their favorite games and brings together the best of Google's infrastructure and open ecosystem approach. With Stadia, you'll be able to play advanced AAA games on any type of screen instantly without ever needing to download the game or install updates. The reception from gamers in the industry has been incredible, and we look forward to sharing more when it launches later this year.
Next, our video platform, YouTube. YouTube's top priority is responsibility. As one example, earlier this year, YouTube announced changes that reduce recommendations of content that comes close to violating our guidelines or that misinforms in harmful ways. There are a lot more improvements which we will be rolling out in the next few weeks, and our work is ongoing.
We have also expanded the content offering, availability and the functionality on some of our newer YouTube experiences. YouTube TV is now available nationwide with many new networks and channels added in Q1. YouTube Music and YouTube Premium are now available in 43 countries, up from 5 markets at the start of 2018. In mid-March, we launched YouTube Music in India, one of YouTube's fastest growing markets. Since launch, the YouTube Music app has been downloaded more than 15 million times in the country.
YouTube's ad business for both brand and direct response campaigns continues to grow and support our creators. In Q1, we again saw how YouTube is the go-to destination for watching the Super Bowl ads before, during and after the big game. This year, viewership of Super Bowl ads on YouTube during the game rose by nearly 60%. More broadly, across our ads business, our advertising product team, led by Prabhakar, continues to build new products for marketers with more than 100 enhancements introduced every quarter. We do rigorous testing on each of these improvements to ensure that we are creating the best experience for users and advertisers. Our focus has always been on investing for the long term rather than managing for results quarter-to-quarter.
I feel really positive about the opportunities ahead and the innovations that we are bringing to marketers, many of which are powered by machine learning. Philipp and our business teams have done a great job helping advertisers take full advantage of these new capabilities. For instance, more than 70% of our advertisers are already using automated bid strategies in Google Ads, and these ML powered technologies help customers get better results for their investments.
In Q1, we began testing new shoppable ad units in Google Images, so brands can highlight multiple products available for sale in sponsored image results. You've also seen us make it easier for people to buy products and take action when shopping on Google Assistant and Search with a universal cart on mobile, desktop and Google Home devices. Since we launched these capabilities a year ago, the number of participating merchants has increased sevenfold.
Lastly, at the Game Developers Conference, we introduced a host of new advertising solutions for developers like App Campaigns for Engagement, which help developers reengage players with relevant ads across Google's properties.
Next, I'll give an update on our Hardware and Cloud efforts. First, Hardware. I'm very proud that in only a few short years, we have built a strong foundation in Hardware. For example, demand for our Google Home family of products remains strong, especially the Home Mini and Home Hub. The breadth and depth of our product lines across Pixel, Nest and Home is amazing, and you will see us continue to develop this incredible lineup. The team has also done a lot of work to scale our operations, and we'll continue to optimize our distribution, branding and points of presence.
We also announced a new campus and engineering hub in Taiwan largely to support our Hardware efforts. Not only are features like Night Sight and Pixel winning industry awards, but Net Promoter Scores tell us that many people who use our Hardware products truly love them, which is particularly important as we move into this new era of computing. We are still early in our Hardware journey, and when I look ahead at the portfolio that we have created across Pixel, Home and Nest, I feel really good about the range of products that we have.
And finally, our growing Cloud business. Thomas has really hit the ground running. Just a few weeks ago, I was on stage with him at our Cloud Next event, where we hosted a sold-out crowd of more than 30,000 attendees. As I said at Next, moving to the Cloud should be simple and seamless. I was excited to announce Anthos, which gives customers a very elegant solution to both hybrid Cloud and multicloud in a single technology stack.
The early feedback from analysts, customers and partners has been really great. We also announced innovations across many of our other products that enable developers to build and deploy AI, help enterprises to better secure their data, allow Android users to leverage their phones as a security key and much more. We are also deeply committed to becoming the most customer-centric cloud provider for enterprise customers and making it easier for companies to do business with us thanks to new contracting, pricing and more.
Today, 9 of the world's 10 largest media companies, 7 of the 10 largest retailers and more than half of the 10 largest companies in manufacturing, financial services, communications and software use Google Cloud. Some of the companies that we announced at Next included the American Cancer Society and McKesson in health care, media and entertainment companies like USA TODAY and Viacom, consumer packaged goods brands like Unilever, manufacturing and industrial companies like Samsung and UPS and public sector organizations like Australia Post.
Finally, to support our customers' growth, we also announced the addition of 2 new Cloud regions in Seoul and Salt Lake City, which we plan to open in 2020. These new Cloud regions will build on our current footprint of 19 Cloud regions and 58 data centers around the world.
20 years in and over 100,000 employees strong, I'm incredibly proud of the work that our teams at Google do every day. We have so many bright opportunities ahead, and seizing those opportunities starts with our investment in the communities where we operate around the world and right here at home. In the U.S., not only are we expanding our workforce across the country, but we are helping people in every state gain the digital skills they need to succeed in today's economy.
In fact, just 1 year after kicking off our collaboration with Goodwill, 0.25 million Americans have learned new digital skills and 27,000 have found a job. We also feel a deep responsibility to make sure that we -- that as we grow our business, we are doing it with minimal impact on the environment. Today, a Google data center uses 50% less energy than a typical data center while delivering 7x more computing power than we did 5 years ago.
Since 2017, we have matched 100% of the electricity consumption of our operations with purchases of renewable energy, and I'm proud that Google is the world's largest corporate buyer of renewable energy. I've never been more excited about Google and where we are headed. I want to thank every Googler around the world for joining us on that journey.
With that, I'll hand it back over to Ruth.

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [5]
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Thank you, Sundar. And we will now take your questions.

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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 Eric Sheridan of UBS.

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Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [2]
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Maybe a couple of parts on the revenue performance in the quarter. Ruth, you'd called out potential volatility on the Q4 earnings call. Wanted to understand a little bit about what you were calling out in Q4 and how that might have manifested itself in Q1 on the product side of the equation, so we could just better understand how much of it was isolated to Q1 or it might be a headwind as we move through the year. And as you look at the individual performance of the ad divisions inside Sites, desktop, mobile search, YouTube, it seems like you were still calling out strength in mobile search and YouTube. So could it be desktop search where we actually saw some weakness in the quarter?

Sure. Thanks, Eric. So I tried to step back and start at the highest level. Obviously, on a reported GAAP basis, revenue growth in Q1 reflects the FX headwind that we talked about in contrast to the tailwind last year. And as you know well, we don't report Sites revenues on a fixed FX basis, but the delta between fixed and floating growth rates at the Alphabet level is a good proxy for the effect on Sites revenue. Beyond that, I tried to draw out that the year-on-year growth rate in part reflects our strong 2018. And then more to your question, as we indicated last quarter, the other item is the timing of product changes in ads can impact year-on-year growth rates. And we make changes with a focus on the best interest of users and advertisers.
Over the long term, we do not manage by quarter, so we are introducing enhancements only after product testing. And that was -- it's sort of the overarching color that I was trying to give you. And in terms of desktop, it was a modest contributor to revenue growth. It does remain an important form factor for certain more complex tasks such as planning vacations or assessing insurance options. And as we've talked about on prior calls, we continue to see the ongoing importance of desktop for many users and many tasks, notwithstanding the growing utility of mobile. So I led with the items that are really driving the growth, but that was a bit more color on desktop for you.

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Operator [4]
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And our next question comes from Doug Anmuth of JPMorgan.

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Douglas Till Anmuth, JP Morgan Chase & Co, Research Division - MD [5]
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So 2 questions. Just following up on Eric's on the revenue growth. Ruth, can you just give us a little bit more detail on the paid click growth, the decel that we saw to 39% from the 50s and 60s last year. So that's just a comp issue or something more specific? And then just on the spending side, wanted to understand a little more just how you're thinking about spending relative to 3 months ago. I know you talked about both CapEx moderating and also headcount moderating 3 months ago. Just curious at least if headcount is still in that camp for your thinking, just given that it seems like there's a pretty big ramp expected under the new Cloud CEO.

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [6]
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Okay. So starting with clicks and CPCs. As we've discussed on prior calls, the biggest driver affecting both CPCs and click trends is YouTube engagement ads with YouTube clicks representing the vast majority of total clicks. And so while YouTube clicks continued to grow at a substantial pace in the first quarter, the rate of YouTube click growth decelerated versus what was a strong Q1 last year, reflecting changes that we made in early 2018, which we believe are overall additive to the user and advertiser experience.
And then in terms of your 2 spending -- the investment questions. In terms of headcount, first, we do continue to expect the growth rate to moderate slightly in 2019 from the year-on-year growth in 2018. And as I indicated in opening comments, we are continuing to invest in technical talent for priority areas like Cloud, search and ML. And so Cloud has been and continues to be the primary area of headcount growth and as Thomas indicated as well and I think Sundar did as well.
In terms of CapEx, just to fill out the last part, I think, of your question, relative to my comments last quarter that we expect the full year 2019 growth rate for CapEx to moderate quite significantly versus the year-on-year growth in 2018, there's no change in our expectation for the year on that point either. The first quarter last year obviously included a sizable real estate acquisition in New York. But overall, we continue to invest meaningfully in our technical infrastructure given our outlook for compute requirements to support long-term growth. Technical infrastructure is the biggest driver of CapEx growth, but we do also continue to invest in office facilities. In fact, as we announced in the first quarter, we expect CapEx of over $13 billion in 2019 just in the U.S. in data center construction and offices with major expansions in 14 states. And more generally, while we're investing aggressively to support our outlook for compute requirements, we're also very focused on improving efficiency with our technical infrastructure. And you can see that through our innovations in things like custom server hardware and TPUs, which can be more cost effective especially for machine learning workloads.

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Operator [7]
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And our question comes from Heather Bellini of Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [8]
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Sundar, I had a question about Cloud. You guys are obviously talking more and more about it. But when do you think you're going to be in a position to share revenue figures or even growth rates similar to what the others have been sharing for quite some time? And then, I guess, a couple follow-ups to that are what would you say the biggest competitive differentiators are of GCP. And what also -- what changes has Thomas implemented for 2019? What are any of the big changes he's focused on that maybe are different than what you were doing before?

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Sundar Pichai, Google LLC - CEO [9]
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Thanks, Heather. Good question. Overall, I would say I think you saw it -- saw the momentum coming out of Next. And I would say at a high level, the key differentiators, which we are focused and which we hear from customers too, the 5 key things are security and reliability, being really open about hybrid multi-cloud customers don't want to be locked into any 1 cloud provider. We want to be a platform for open source, and so we're really working well there in enabling options, AI, ML as a capability. And finally, as customers think about digital transformations, we bring all of Google's advances to bear to help them through the journey.
I think I would say, Thomas is really building upon a strong foundation, but we're really accelerating and scaling up go to market both internally and through our channel partners has been a huge focus. I'm incredibly excited that we just announced a couple of weeks ago that [Robbins Linness] joined us to head go-to-market. And just along with Thomas, both of them bring close to 3 decades of serving enterprise customers. And so that reflects the commitment we have. I think we are building a strong business across all our verticals, and we definitely are seeing strong momentum and look forward to being able to share more at the appropriate time.

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Operator [10]
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And our next question comes from Anthony DiClemente of Evercore.

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Anthony Joseph DiClemente, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [11]
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I have 2, 1 for Ruth, 1 for Sundar. We noticed that larger than expected slowdown in the properties TAC in the quarter, that includes cost of mobile search, while the other cost of revenues, which includes YouTube content costs, seem to maintain that expected growth rate despite what you said about more moderate turns in Hardware. So just wondering if that's a wise way to infer anything about the relative performance of mobile search revenue versus YouTube from those cost lines in the quarter. And then on Waymo, maybe for Sundar. We're hearing more and more about collaborations between ride-sharing networks and AV providers. So the idea of mixed fleets or part human, part AV as a means of potential deployment of AV technology, so can you just comment if that mixed fleet approach would be something that you think Waymo would consider versus its own full ride service network?

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [12]
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So in terms of the Sites TAC rate, a couple of things. We've discussed this previous -- on previous calls. We have expected the year-on-year growth in the TAC rate would begin to slow starting in the second quarter last year. And you saw that through the balance of 2018. And this quarter, the constant TAC rate versus last year reflects ongoing growth in mobile, but it also benefited from growth in YouTube, where the associated content and costs are included in other cost of sales. And so that's the most important thing to point to. The other is --we've previously discussed is TAC as a percentage of revenues is also affected by a number of other factors such as changes in product mix, device mix, partner mix, et cetera. So I'd really point you to the first point there.
And then as it relates to Waymo, I guess a couple of things. We continue to be most focused on the ride-sharing business here. We're pleased with the expansion in the number of Waymo riders that we've added since the last quarter. But as we've talked about on prior calls, we do continue to pursue a number of other opportunities, long-haul trucking, we've talked about, logistics, deliveries, personal use vehicles, last mile solutions for cities and then probably more to your question, licensing our technology. And we did announce in March that we're making one of our 3D LiDAR sensors available to companies outside of the self-driving car service beginning with robotics and physical security, in other words, in -- for warehouse use or for farming. And our view is that, that can provide further operating leverage to our business. So we're actually looking at it in a number of different ways, but the primary focus continues to be on developing the ride-hailing business.

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Operator [13]
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And your next question comes from Stephen Ju of Crédit Suisse.

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Stephen D. Ju, Crédit Suisse AG, Research Division - Director [14]
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So Sundar, I wanted to follow up on your Stadia commentary. How are your conversations with some of the larger PC and console publishers going right now? You obviously offered them additional distribution outlet with billions of users, which is something that they probably didn't have before. But what is the pushback that you might be getting from publishers, if any?

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Sundar Pichai, Google LLC - CEO [15]
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I think their genuinely -- the main thing we see, genuine excitement because I think they see the opportunity for a shift, a point of inflection, but they realize the technical challenge of pulling something like this off, and so -- but once they get their hands on with the technology and then they see the experience, I think, it really wins people over. And so we are having conversations across the board, and I think people are definitely engaging in a very committed way, and they're investing in it. And so it's up to us to bring it all together and have a [coupling] service later this year, and that's what the team is, heads down, working on. But I think not pushback per se, but they want to see our commitment, which is what we demonstrate. And they are working hard to make the investments on their side. And so it's a big joint effort, and it's working well.

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Operator [16]
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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 [17]
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I have 2. The first one, let's go back to the product changes. Ruth, any more color on sort of which products or regions are most impacted by these changes? And just so we can understand a little bit, can you just help us with the key user experience you're trying to solve for and sort of the message to your advertisers who may be spending -- who may be growing their spend less now, but why that's going to be positive for the long term? And then, Sundar, just go to your comments about YouTube. You mentioned more potential changes coming on YouTube in the next couple of weeks. Can you just talk to us about that a little bit?

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Sundar Pichai, Google LLC - CEO [18]
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Maybe I'll start with the YouTube comments. I talked about, in the area of content responsibility, we are definitely focused on making sure we are constantly improving how we are handling both in terms of reducing the content that shouldn't be there on the platform and then more importantly, making sure, when we recommend content, that we are recommending high-quality content as well as reducing harmful content or low-quality content being recommended. I think we had a set of launch, which we have rolled out, but I think there are more launches coming, which will constantly improve what you see in YouTube and continues to be the most important area of focus for them.
On the first question in terms of products, I think we are -- I presume when you say back to product changes, I think you're talking about the advertising experience. I think the main thing I would say is, I mean, we don't -- I think we have a long, long-term way of thinking about where we want to go and we have a disciplined framework by which we think and evolve our products. We don't necessarily look at it from a quarter-on-quarter basis, though we obviously have had consistent performances. We approach our work differently, and so you are going to have quarter-to-quarter variations once in a while. But we remain confident about the opportunities we see. And I'm looking ahead to that, and we are focused on that.

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Operator [19]
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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 - Analyst [20]
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Sundar, you'd reminded us how April and May are pretty big months for the company with a series of your large annual events. And of course, each of them -- each of those businesses have their own goals and targets. But we also hear -- continue to hear more about your teams working together, for example, a large cloud engagement leading to higher ad spending from an enterprise. Can you talk to us just a little bit about how you balance having your leaders grow their own businesses with also incentivizing them to work together? And then second and kind of completely differently, would love to just hear your updated views on data collection and use. I'm sure you've continued to have some dialogue with politicians and regulators. We've seen some reports on more potential changes in Chrome or within the advertising platform. Would love to hear how maybe your latest discussions are in view -- are informing both the near- and long-term view on policies with regards to data collection and use.

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Sundar Pichai, Google LLC - CEO [21]
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Thanks. And I mean you're right. These are a couple of very busy months, and it's particularly busy leading up to I/O. And I would say in terms of how we work together, first of all, as a company, I think we take our OKR process extraordinarily serious in a very committed way. And we do write cross-company OKRs, and it really reinforces ways by which different groups can work together. And we measure them and we will hold people accountable to that. That's an important part of how we get at businesses, both while they focus on their product areas, their business, they need to work together. Second, as a leadership attribute, it's something that's really important to me. And so it's something that the leaders across the table share that goal, and I think it's largely cultural as well.
Vis-à-vis, privacy, and it's actually one of our most important areas. As a company, we've always tried to stay a step ahead. User expectations around privacy are constantly evolving, and we stretch ourselves to meet them. And as part of that through this year, we are continuing to do a lot of work just with the overall goal of making sure privacy works for everyone and it's actually simple to use. And as part of that, we'll have more changes through the course of this year, be it Chrome. Chrome is super committed to making sure it's best in class in privacy and security, and we always put user experience first and follow through.
Through all these changes, we need to be mindful of the content ecosystem and the publisher ecosystem. Advertising continues to be an important way by which they create value and they see value. And so we are very thoughtful about how we approach our work.
And there's been a lot of interest across the board. I think we early on engaged with GDPR, they are big supporters of it in terms of being constructive and working early to get ready. I think it's important U.S. supports -- has a clear framework on a federal basis for privacy regulation, and it's something we feel is timely as well. And so we have called for it and happy to be thought leaders as well as engage where needed.

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Operator [22]
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And our next question comes from Colin Sebastian of Baird.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]
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I have a couple. First one, follow-up on the revenue growth dynamics, specifically the sequential growth trend. I wonder if we should assume now that there's greater seasonality in core search just given the increasing mix of shopping and product ad formats. And Sundar, question on AI and machine learning. Since clearly this remains an area of significant strength for the company, I'm wondering what stage of development you characterize these stools at being today? And whether we should expect the overall pace of advancement from AI to accelerate in terms of products and services?

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Sundar Pichai, Google LLC - CEO [24]
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On the first question around seasonality and stuff, I mean, we -- throughout the course of the year, we always deal with many events, no patterns. There are a few patterns, which are consistent year-on-year, but there are always one-off events, which happen. So there is in-built variation, so, which we work through every quarter, and so I think that's a natural part of what we do. There's definitely seasonality in businesses like Hardware, and that you are right. Commercial behavior has seasonality associated with it. But we do deal a lot with one-off events as well and -- but we always work our way through it.
On machine learning, I do think we are at very early days. I'm excited that, over the last 3 years, taking an AI-first approach, we've really incorporated machine learning core -- in a core way across our product to benefit our users. And that's true for advertising as well. I think we are in early stages of making it easier for businesses to understand what they're looking for and us taking care of more and more work, and we are doing it across the board. But there is a lot of headroom here.

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Operator [25]
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And our next question comes from Justin Post of Bank of America.

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Justin Post, BofA Merrill Lynch, Research Division - MD [26]
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Maybe one for Ruth and one for Sundar. First, Ruth, on mobile search, can you let us know how that did versus your expectations? I know there's a lot of noise from YouTube in that line. But how's mobile search doing? And what are the key drivers now for mobile search? Is it queries? Is it driving higher click-through rates, ad format changes? What are the drivers as you think about the next couple years? And then, Sundar, could you just -- on the Hardware business, I think there are some concerns that it's just not getting off to really strong trajectory, some comparisons to Microsoft 10 years ago. Really just help us understand how that Hardware business is important to Google and how you're thinking about it long term.

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [27]
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So in terms of mobile search and the Sites revenue more broadly, I think the main point is -- we both tried to indicate in opening comments is we view the advertising opportunity as significant, in particular the opportunity with machine learning both for users and advertisers as well as our commitment to product innovation and being the backdrop of an environment which nearly half of ad budgets in the U.S. are still spent offline and about 90% of commerce in the U.S. is still offline. And we're focused on digital playing a bigger role in that and tapping into other marketing budgets by offering an attractive ROI.
And then apart from people spending more time on digital content, to your question, we know that better measurement, better ad delivery, better user experiences all help grow the pie for everyone in the ecosystem. And then more broadly within YouTube, as we talked about last quarter, we do continue to see significant growth in direct response, and we remain excited about the upside potential there. Brand advertising is still the largest part of the business. It's growing at a strong pace, but we called out direct response given what we see as the upside potential.

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Sundar Pichai, Google LLC - CEO [28]
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And Justin, on the Hardware business, as I said earlier, we are still in our early days, but our commitment is very strong. We really see this incredibly important to drive the future of computing forward and to make sure our services are presented to users in a -- in the way that we intended them to be. And so overall, we view this as a hugely important opportunity.
When we look at the business even for -- given we are more recent to it, we already -- if you take areas like Google Home and Assistant product, we are doing really well. We see strong momentum. I think we are market leaders in the category and especially when you take a look at it on a global basis. And so for -- computing will continue to evolve even beyond phones. And so we want to make sure we are in there, and we are very committed to it for the long term.
Our phones, definitely across as an industry, I think they are working through a phase where there is definite year-on-year headwinds. But I do think -- especially the ecosystem is constantly pushing it forward. I continue to be excited about the innovation speed, 5G coming or the early look into foldable phones, which Android plays a big part in driving. So I do think there is a lot more to come, and we are focused on it. And I -- when I look at the product quality, how it's improving, user feedback in terms of Net Promoter Scores and the range of lineup that we are working and how our products are getting better year-on-year, I remain very excited.

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Operator [29]
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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 & Senior Internet Analyst [30]
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I guess I'll just beat the dead horse on the deceleration comment again but maybe a different way, Ruth. So why did Europe and U.S. -- Europe ex FX and U.S. growth rates drop off much more than Asia and then other? Any comment on why the decel was more pronounced in Western markets? And then stepping back, we've seen pretty solid growth rates from the digital ad sector broadly in the first quarter, and you flagged a lot of this back in February, so clearly, this isn't a surprise to you. But how much of the deceleration in Sites ex FX was from maybe advertiser demand issues in these markets versus proactive changes that you may have made on your end to the product?

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [31]
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So in terms of the regions, the year-on-year growth rates reflect the product comments that I made with respect to the first quarter. The -- I think the -- you had the U.S. -- U.S. and Europe had about the same delta year-on-year. Other Americas was more pronounced. That was really more of the impact of Hardware. And then APAC, I think maybe is what was guiding some of your question, continues to be a very strong performer and continue to deliver in the 30% plus or I think 31% on a fixed FX basis. We're well positioned, growth throughout the region. Sundar's comment on some of the things that we're seeing, the big focus on the next billion users and excited about the opportunities across the board there.

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Sundar Pichai, Google LLC - CEO [32]
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And I don't think there were any demand issues, to the last part of your question. And as we said earlier, we work through a set of product development pipeline in a very disciplined way focused on user experience. And that makes its way, too, and that's how we approach it.

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Operator [33]
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And our next question will be our final question today from the line of Brent Thill of Jefferies.

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Brent John Thill, Jefferies LLC, Research Division - Equity Analyst [34]
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Just a follow-up on the last question on EMEA and U.S. Was there any go-to-market changes in terms of the sales force or how you set quota or anything that may have been effectively a Q1 seasonality issue that may see some snapback in Q2?

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Ruth Porat, Alphabet Inc. - Senior VP & CFO [35]
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The opening comment, I said that one of the points is that we had a strong year last year and we're looking at performance in line with that. I would say more broadly overall in terms of go to market, our long-term investment thesis remains unchanged. We're excited about the opportunities ahead. We do continue to invest to ensure we remain well positioned for the long term. That applies across the businesses. And so there wasn't a change that anything other than the comments that I had made. I think if I could just maybe expand on the investing pace, as we're looking at the pace of investing and supporting growth around the globe, what we're really looking at is what's needed to support long-term revenue and earnings growth. The operating margin did benefit in -- as I noted in my opening comments that -- from the fact that Q1 marketing expenses growth moderated, but that was a timing issue. We do expect a pickup in marketing expense in the second quarter, and other than that, really nothing to comment on.

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Operator [36]
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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 closing remarks.

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Ellen West, Alphabet Inc. - VP of IR [37]
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Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter call. Thank you, and have a good afternoon.

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Operator [38]
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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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