Alphabet Inc Q2 2023 Earnings Conference Call Insights

Key highlights from Alphabet Inc (GOOGL) Q2 2023 Earnings Concall

Management Update:

• [00:09:08] GOOGL said Google Cloud is seeing strong demand for its new generative AI offerings, with the number of customers growing more than 15x from April to June.

• [00:18:20] The company said Google AI was a key driver of growth in 2Q, with new products and features such as the conversational experience in Google Ads and the virtual try-on tool.

• [00:27:12] Google Cloud revenue growth was 28%, but consumption growth moderated. Google Cloud is investing aggressively in AI-optimized infrastructure and large language models and expects elevated levels of investment in its technical infrastructure through 2024.

Q&A Highlights:

• [00:32:52] Brian Nowak of Morgan Stanley asked about early learnings and surprises about how people are using Bard versus Search, and what new behaviors or consumer utility are you most excited about for Gemini. Sundar Pichai CEO said early feedback on Bard and search-generative experience has been positive. Users are finding new ways to use the technology, with the integrated Google Lens feature particularly well-received. The multimodal nature of Gemini is also expected to be a major area of excitement for users.

• [00:33:22] Brian Nowak with Morgan Stanley enquired if the company still expects expenses to grow slower than revenue in 2024, and if it includes the impact of depreciation. Ruth Porat CFO said GOOGL is pleased with its operating performance in 2Q, with revenue growth ahead of expense growth for the first time in some time. The company remains focused on durably reengineering its cost base.

• [00:35:56] Eric Sheridan at Goldman Sachs asked how GOOGL sees differentiating its AI offerings in the years ahead, through open source, custom silicon, and other means. Sundar Pichai CEO answered that GOOGLE is committed to investing in AI and open-source technologies, and believes that it will help the company stay at the cutting edge of technology and serve its users and customers well in the long term.

• [00:40:24] Doug Anmuth of J.P. Morgan enquired how the company plans to integrate generative AI into search, and the factors determining the timing of this integration. Sundar Pichai CEO said that the search generative experience represents a significant technological advancement, driven by AI innovations and a deep, first-principles approach. The positive feedback and impressive metrics indicate that it is surpassing expectations, and the plan is to gradually introduce it to more users as the future of search.

• [00:40:35] Doug Anmuth of J.P. Morgan asked if GOOGL still expects modestly higher capex in 2023 vs. 2022, and about the timing of real estate and office optimization efforts in 2023 and 2024. Ruth Porat CFO replied that GOOGL expects elevated levels of investment in its technical infrastructure in the back half of 2023 and into 2024, primarily to support the opportunities in AI across the company.

• [00:44:06] Lloyd Walmsley of UBS asked about monetization of SGE and how it will affect query growth in the short-term and long-term. Sundar Pichai CEO said GOOGL is pleased with the early results of SGE, and believes that the technology has the potential to improve the user experience and generate more revenue from advertising.

• [00:46:29] Justin Post of Bank with America asked about the pipeline and client wins in the cloud business, and whether the company is seeing any uptick in AI spending. Sundar Pichai CEO answered that Google Cloud is excited about the long-term opportunity in AI, as it sees AI as a way to expand its total addressable market, upsell and cross-sell to its install base, and differentiate its core products.

• [00:48:47] Justin Post of Bank of America asked if the growth rate of the infrastructure cloud exceed that of Workspaces again in 2Q. Ruth Porat CFO said that in 2Q, the growth rate of GCP was higher than the overall growth rate for cloud.

• [00:50:02] Michael Nathanson at Moffitt Nathanson asked how Google is revisiting its R&D spend, and what factors could change the growth code for R&D going forward. Sundar Pichai CEO said that GOOGL’s commitment to driving deep computer science research and innovation remains unchanged. GOOGL will continue investing in AI to realize its potential while maintaining its philosophy and approach to R&D, ensuring responsible development and optimization.

• [00:52:22] Ken Gawrelski from Wells Fargo enquired about the success and potential use case expansions of Performance Max, and the timeline for achieving more automated AI-generated creative production. Philipp Schindler SVP answered that GOOGL is using AI to improve its advertising products and services, including Performance Max. The company is also working on new AI-powered features, such as automatically created assets and product studio.