Below are the main contents of the Google 2022 Third Quarter Performance Conference Call. For financial report interpretation, please refer to "Google: Approaching Decline, Ad King Has Fallen".
Management Report
1. YouTube
(1) Improved commercial ability of Shorts. Beginning next year, revenue sharing will be introduced on Shorts. This update makes YouTube the only platform enabling creators to monetize content on a large scale through short, long videos, and live videos.
(2) Shorts continues to show strong user growth momentum, and the company will continue to invest in mobile video tools for creators. The company has observed that creators are continuously investing on mobile platforms and creating quality content to help grow a wider community.
(3) Television is also a significant area. According to Nielsen's report, YouTube became the leading streaming TV audience rating in the United States in September. On average, users worldwide watch more than 700 million hours of YouTube content on television (CTV) every day.
(4) MAU reached 1.5 billion, with over 30 billion daily views, and high engagement. The company's primary focus is on creating excellent user and creator experiences and achieving profitability over time. As of September, advertising on Shorts has officially launched through video action applications and performance maximization activities.
(5) Expanded the YouTube Partner Program and announced a revenue sharing model for Shorts creators, which is the first model for short video content. It is still in its early stages, but we are satisfied with the short-term monetization and support for maintaining the creator ecosystem this year. Only when customers and partners succeed can the company succeed, whether it is helping YouTube creators or game developers make a living and build thriving businesses or providing partners with Google's best services. We remain firmly committed to driving partner and key ecosystem growth. I am proud to say that in the past three years, the company has paid out over $50 billion in fees to creators, artists, and media companies.
In helping partners innovate:
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In a transformative partnership with Transsion, many OEMs in Africa and Pakistan will help narrow the digital divide by doubling annual activations by 2025, and create useful products for the next billion users.
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When working with FEMSA digital in Mexico, the company will integrate advertising, cloud, mapping, and other solutions to enhance data analysis capabilities and better reach and retain retail customers.
2. Search Advertising
In Q2, advertiser spending on YouTube and affiliate advertising fell, and these declines further intensified in Q3. The biggest factor in the Q3 slowdown in year-on-year growth for search advertising and other areas is the high base of 2021. (1) In Q3, some advertisers experienced a decline in spending on search ads in certain areas. For example, subcategories such as insurance, loans, mortgages, and cryptocurrency saw a slowdown in the financial services industry.
(2) The company is focusing on maintaining its efforts in providing assistance. AI has propelled innovation in advertising products, from protein folding to language understanding. With insights, automation, and more user-friendly advertising tools and formats, businesses can remain agile, build resilience, predict the future, and showcase to customers in a more connected visual and cohesive manner. It also helps businesses understand demand, respond to inventory challenges, and increase loyalty.
(3) In challenging times, advertisers are carefully evaluating the effectiveness of their budgets. With its strong measurability and focus on providing return on investment, search advertising tends to perform relatively well in such an environment. It is also highly adaptable to quickly changing consumer behavior. When combined with the company’s automation products in bidding, creativity, targeting or performance maximization, it can further drive performance.
3, Shop
It is currently an important vertical area for us, providing customers with a variety of solutions, for both online and offline shopping experiences. Customers use scenarios such as the Revolve retailer, with precision targeting in search and Shop functions for consumers with high demand for clothing.
4, Innovative Projects
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Waymo: Waymo announced that Los Angeles will be its third ride-hailing city, following Phoenix and San Francisco. Waymo will first map several communities in Los Angeles to provide service to its residents.
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Wing: Commercial delivery just exceeded 300,000. The company is providing services to new areas in Australia and has announced its first drone delivery test in Ireland.
Analyst Q&A
I. Advertising Business
Q: Changes in YouTube user search ad behavior under the influence of TikTok; will search ads be more visually oriented to cater to the needs of young people?
A: The company conducts many studies each year to understand the evolution of user needs, some of which have shown that younger users in certain categories tend to seek fashion inspiration visually. The company improves search advertising based on research findings, providing users with the best service through healthy iterative innovation.
Q: Characteristics of Performance Max that attract advertisers; can such characteristics enhance the ROI of Pmax?
A: In addition to the features mentioned above, no further features have been seen at present.
In July, the company launched many new settings such as seasonal settings. Marketing personnel made significant typical adjustments and optimization score settings for seasonal advertising series bidding, providing performance improvement indicators and better result recommendations for advertisers.
Overall, we are excited about the future development of PMax and further simplifying the product, frankly speaking, to continue delivering value to businesses of all sizes, especially when they need it most. Q: Are there any common features among advertisers who require the callback of their demand?
A: Q3 ad business has shown strong YoY growth. In terms of slower YoY growth, Q3 has shown healthy growth (excluding forex impact), and the decline in growth is due to the industry coverage affect, which caused some advertisers to cut back spend. For example, in the financial services industry, subcategories such as insurance, loans, mortgages, and encryption experienced a callback.
On the YouTube and affiliate advertising fronts, there has been an increase in decline in Q3, aside from the decrease in ad spend by merchants, advertising spend for app promotion on YouTube and network has also declined.
Q2. Shorts
Q: Consideration of priority investment business based on macro-environment expectations in the next 6-12 months; Revenue expectations for YouTube Shorts and Connected TV in the medium to long term
A: In the past, the company has had good growth periods, and the current adjustment phase provides an opportunity to prepare for the next ten years of growth to ensure that incremental investment is directed to the most important and adjustable areas in the face of macro-environment changes.
The expenditure of advertisers on brand advertising and performance advertising fell in Q3, but overall, YouTube is still in a position to benefit from the booming streaming media.
(1) In terms of performance advertising, Youtube has great potential to become a shopping platform, and advertisers are turning to YouTube to drive scalable performance. The product will soon appear in Discovery ads and has recently expanded to Shorts. On average, the conversion rate of videos with product information on Shorts has increased by more than 70% compared to those without.
(2) In terms of brand advertising, the company is helping brands go beyond tradition to truly improve their impact and visibility. Connected TV is an important part of this strategy, and YouTube is indeed the best place for advertisers to reach new consumers.
Q: Has the duration of Shorts users increased? Have you seen any migration from other forms of YouTube to Shorts?
A: Focus on building a user and creator experience first, then gradually realize monetization. Currently, the proportion of Shorts viewing time to total YouTube viewing time has increased, and although revenue has experienced a slight headwind, initial progress in monetization has been excellent, and we will focus on gradually narrowing the monetization gap between Shorts and long-form content.
Three, cloud business
Q: Changes in cloud business demand; investment pace for cloud businesses
A: Satisfied with the current development momentum of the cloud business, its cross-industry and geographic breadth help companies solve unique business problems and continue to promote customer digital transformation and innovation.
As mentioned in Q2, due to the idiosyncrasies of macroeconomic or customer-specific business, some clients have shorter transaction periods or smaller transaction sizes. But overall, based on the development momentum of cloud businesses, continued long-term investment will be made to achieve profitability and monetization.
IV. Revenue and Expenditure Management
Q: What are the reasons for the 20% YoY growth in other costs and future expectations?
A: The YoY growth in other costs comes from:
1) Data centers and other businesses.
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In Q3, hardware costs increased significantly.
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The impact of CAC on cost drivers has dropped from the usual second place to the third. There are two reasons for this. The YoY decline in YouTube advertising revenue clearly weakened CAC growth. And the hardware cost itself came from the sales growth of Pixel 6A phones.
The company's focus on profitability is on the overall pace of investment, and is currently studying how to drive revenue growth and positive growth through a mix of changes and sustained opportunities. The increase in profit margin in 2021 was partly due to very strong revenue growth, while investment lagged behind and will continue to be managed to achieve long-term revenue growth.
We are taking action to apply artificial intelligence to search ads and YouTube and continue to promote Shorts monetization, while also advancing cost reduction and efficiency improvement efforts.
Q: You mentioned that the company's revenue structure is facing changes, and low-profit projects such as YouTube subscription revenue and hardware revenue are increasing in proportion. Does this mean that the profitability of the entire Google service (advertising, subscription, hardware, etc.) in the coming years will be lower than during the pandemic? It is currently approximately 32%, will we see the low point of 27% in Q2 2020?
A: There is still much opportunity for growth in search, YouTube, and AI investments for both businesses, and Shorts will contribute to YouTube's profitability.
At the same time, we are making some adjustments to resources, saving and effectively using resources. The increase in profit margin last year had short-term factors and our investment lagged behind during strong revenue growth.
Q: Since the beginning of 22, 51,000 new employees have been recruited. What is the quantification of ROI for new employees for investors?
A: 22Q4 and 2023 hiring plans will slow down. Talent is the most valuable resource, so we will ensure that the talent we bring in works on the most important things for the company. We will review all projects currently and in 2023 to ensure that resources are allocated reasonably.
Q: Q4 Human cost and non-human cost management plan
A: More development opportunities have prompted the company to try its best to redeploy talents efficiently, which is currently the top priority.
The operating environment has added urgency to determine priorities, and the company hopes to ensure that all resources are used as efficiently as possible. At the same time, we will continue to invest in areas with development opportunities. Therefore, part of it is resource optimization to free up space to ensure that there is the ability to invest in opportunities that can bring lasting and long-term results to the company. Q: The impact of economic fluctuations on Google; How is the current environment compared to previous cycles in the company?
A: Firstly, there is currently more uncertainty.
Secondly, search advertising can provide investment returns in difficult times in the advertising market, which is a good phenomenon for both users and advertisers.
Thirdly, the company has attached great importance to AI in the past 7 years, and now has a major development opportunity.
The company will determine the focus and priority order based on these opportunities, and prepare for the future 10 years of development.
V. Artificial Intelligence
Q: Did the 31% year-on-year increase in capital expenditure result from investment in cloud services or building artificial intelligence?
A: Most of the capital expenditure continues to be used for technology infrastructure, and servers are the biggest driving force for investment. The technology infrastructure team has been focusing on means to improve utilization. Currently, investments are being made to build computing capabilities to support the work of the AI team.
In addition, office decoration is still ongoing to adapt to the new hybrid work environment, and efforts are being made to ensure that the pace is appropriate.
Q: How does artificial intelligence combine with search advertising?
A: Artificial intelligence is still in the early stages, and the research team is making progress in combining it with search advertising. Many transformer-based models, such as BERT, MUM, and SearchNow, have greatly improved search quality and helped the company expand its leading quality advantage over other products.
Returning to some of the earlier questions about search, they were mainly visual issues, such as Google Lens, which makes visual search able to point the phone at things and ask questions, all of which are really helpful for setting a search function for future computing development direction. But AI not only affects search, it affects all products, making YouTube, ads better, and bringing it to other companies through cloud services.
Risk Disclosure and Disclaimer for this article: Dolphin Analyst Disclaimer and General Disclosure
