The following is the summary of the Q2 2023 earnings conference call for $ Alphabet(GOOGL.US), and the earnings report review can be found in Google: Breaking Doubts, Can the Ad Leader Make a Comeback? .
I. CEO Remarks
This quarter, we made significant progress at events such as I/O, Brandcast, and Google Marketing Live, with Cloud Next scheduled for August.
1. Search Ads and SGE
The momentum within the company drove our performance this quarter. We delivered solid results in search and YouTube, maintained strong growth in the cloud, and focused on long-term value creation. Additionally, we continued to improve operational efficiency and create sustainable savings to fund our most important investment priorities. Today, I will discuss this momentum, including our continued leadership in the field of artificial intelligence and our excitement about the evolution of search.
At the I/O conference, we shared how we are making artificial intelligence helpful to everyone through four key ways. The first is enhancing knowledge and learning capabilities. As an AI-driven company, this has been our seventh year, and we naturally know how to integrate AI into our products. Large-scale language models make them more useful, such as PaLM 2 and the upcoming Gemini, where we are building multimodal capabilities.
These advancements provide opportunities to reimagine many of our products, including our most important product, search. We are in an incredibly innovative period for search, as it continues to evolve and improve.
The user feedback has been very positive. It can better answer the queries people have for us today, while also unlocking new types of questions that search can answer. For example,
We see this new experience as another starting point for exploring the web, enabling users to delve deeper into knowledge about a particular topic. I am proud of the engineering excellence behind the progress we have made. Since its launch in May, we have improved service efficiency by halving the time required to generate AI responses. Over time, we will provide even faster response times. We are engaging with a broader ecosystem and will continue to prioritize methods that can deliver valuable traffic and support a healthy open web. Advertising will continue to play an important role in this new search experience. Many of these new queries are essentially commercial in nature. We are testing and continuously improving ad placement and format, and providing advertisers with tools that leverage generative artificial intelligence. Philipp will discuss in more detail how we use generative AI in our advertising products to better serve advertisers and users.
Secondly, we are helping people enhance their creativity and productivity using artificial intelligence. One example is our experimental project Bard, a conversational AI. Since its launch in March, it has shown continuous improvement. Earlier this month, we introduced some exciting features and capabilities. These new features have been well-received, and it's great to see people sharing their experiences. Bard can now read out its responses and adjust them based on tone and style. We continue to see strong interest in using Bard for coding tasks. In terms of productivity, earlier this year we launched Duet AI in Google Cloud and Workspace. It helps people collaborate closely with AI code and gain better insights from data. Now, in preview, over 750,000 Workspace users have access to these new features.
Thirdly, we are making it easier for others to innovate using artificial intelligence. One way is by providing high-performance infrastructure in Google Cloud optimized for various generative AI models. Thousands of customers and partners are using it to transform their businesses. I will provide an update on our cloud business later.
Lastly, we ensure the responsible development and deployment of AI technology for the benefit of everyone. Last week, we joined other leading AI companies in signing a joint commitment at the White House, building on the principles that have guided our work for years. To harness the opportunities of future AI, we have been sharpening the company's focus, making disciplined investments, and finding areas where we can operate more cost-effectively. We have made good progress in data center machine efficiency and will continue to invest in AI while delivering returns. We continue to moderate spending growth and hiring pace, ensuring our team aligns with our top priorities.
This quarter, we have realigned several teams, including aligning ad sales with our existing business organization. We are integrating various engineering efforts in core infrastructure and cloud computing. Products like Bard and SGE have been built by small, nimble teams that have been reassigned to these high-priority projects. Overall, we are actively redeploying personnel to higher-priority initiatives within the company and optimizing our office space utilization for current and future needs.
2. Updates on Google Cloud
We have seen continued growth with second-quarter revenue of $8 billion, a 28% increase, and operating profit of $395 million. We have optimized our AI infrastructure to become a leading platform for training and serving generative AI models. We offer the widest range of AI supercomputers, using Google TPU and advanced NVIDIA GPUs, and recently launched the new A3 AI supercomputer powered by NVIDIA's H100, enabling customers like AppLovin to achieve nearly twice the price performance of industry alternatives.
We have seen strong demand for over 80 models, including third-party and popular open-source models in our Vertex, Search, and Conversational AI platforms, with customer numbers growing over 15 times since April. Priceline is improving travel planning capabilities, Carrefour can create complete marketing campaigns in minutes, and Capgemini is building hundreds of use cases to streamline time-consuming business processes. Our new AI for anti-money laundering helps banks like HSBC identify financial crime risks, while our new AI-driven prospect and lead identification suite is being applied by Cerevel to aid in drug discovery.
Our generative AI capabilities have also won us new customers, as mentioned earlier with Duet AI. Instacart is using it to improve customer service workflows, while companies like Extend are expanding sales promotions and optimizing customer service. Customers can confidently choose Workspace as we provide security and assurance for their distributed workforce.
Our AI capabilities are helping us differentiate core products, such as the fully integrated Chronicle Security Operations Suite with Mandiant, to keep customers protected at every stage of the security lifecycle. In the first half of 2023, we have seen a 35% increase in incident response engagements compared to the same period last year.
Lastly, our AI capabilities have expanded our partner ecosystem. We collaborate with hundreds of ISVs and SaaS providers, such as Vox, Salesforce, Snorkel, and the world's largest consulting firms Accenture and Deloitte.
3. YouTube Update
Earlier this year, we shared that YouTube generated nearly $40 billion in revenue in the 12 months ending in March. I am thrilled to see how YouTube continues to attract more viewers and increase user engagement. In the United States alone, we reach over 150 million people through connected TV screens, and we are seeing growth and momentum internationally. On the front of YouTube subscriptions, there has been good growth. At the end of last year, we announced that we had 80 million YouTube Music and Premium subscribers. Sign-ups for NFL Sunday Ticket began in April, and we look forward to hosting the first football season on YouTube this fall.
4. Hardware and Android
Pixel continues to maintain strong sales momentum. Our latest operating system, Android 14, will integrate our advancements in generative AI to personalize Android phones. The Pixel and Android teams are working together to drive the development of the latest devices. The Pixel Fold is a great example, featuring numerous hardware and software innovations.
Before I conclude, you may have already seen the exciting news that we just announced: Ruth will be taking on an important new role as President and Chief Investment Officer. As our longest-serving CFO, she has helped the company navigate an incredible period of growth, a global pandemic, and the resulting economic uncertainty. I'm thrilled to continue working with Ruth as she leads our 2024 planning and continues in her role as CFO, while we conduct a comprehensive search for her successor. So, everything remains business as usual with no strategic changes in the future. I look forward to seeing the impact Ruth will make in her new position, driving our investments, engaging with stakeholders, and creating opportunities for people and communities around the world.
Finally, I'm energized by the innovation and development happening across the company. We have many opportunities to fulfill our mission. Thank you to all our employees worldwide for their outstanding work this quarter.
II. CBO Remarks
Let's dive straight into this quarter's performance. Revenue for Google Services was $66 billion, a 5% YoY increase.
In terms of Google Ads, search and other revenues grew by 5% YoY, driven primarily by robust growth in the retail vertical. YouTube ad revenue increased by 4% YoY, with brand awareness driving direct response and reflecting further stability in advertiser spending. Network ad revenue, however, declined by 5% YoY.
Now, let's take a few minutes to discuss our three key priority areas. I've previously highlighted these areas as clear opportunities for long-term ad growth.
1. Google AI
The second quarter was significant for Google AI and our advertising products. I/O, GML, and Brandcast showcased our deep commitment to building cutting-edge tools and solutions that help businesses navigate complex environments in real-time and achieve their desired outcomes while enhancing user experience. Sundar has already introduced some of these innovations, and I will share more information. It's worth reiterating that while generative AI presents tremendous potential for new and existing advertising products, AI has been at the core of our advertising business for many years. In fact, today, nearly 80% of advertisers are already using at least one AI-based search advertising product.
Our approach to AI and advertising still remains focused on delivering true value to businesses and considering what is most helpful to users. Advertisers have told us that they want more assistance in order to connect with us faster. Therefore, on GML, we have introduced a new conversational experience for Google Ads, supported by LLM technology that has been debugged with advertising data, making it easier to build advertising campaigns. Advertisers have also expressed their desire for assistance in creating instant and effective high-quality ads.
As a result, we are launching an improved asset creation process and Performance Max, which helps customers adjust and expand their most successful creative concepts within a few clicks. There are also more features in PMax. We have introduced new asset insights and new search term insights to enhance understanding of ad campaign performance, as well as new customer lifecycle goals that allow advertisers to optimize for both new and existing customers while maximizing sales.
We have always said that the key is to show the right creative to the right customer at the right time. Therefore, later this year, automatically created assets will start using generative AI to create assets that are more relevant to customer queries, which has garnered widespread attention and has been described for search advertising. Broad match has also been updated. AI-based keyword prioritization ensures the selection of the right keywords, bids, budgets, creatives, and landing pages when multiple overlapping keywords meet the criteria. To make it easier for advertisers to optimize visual storytelling and drive consideration in the middle of the funnel, we are introducing two new AI-powered advertising solutions, Demand Gen and Video View campaigns, both of which will include Shorts inventory.
Sundar previously mentioned SGE and our early experiments with new ad formats. We are actively engaging with advertisers, publishers, and partners to gather their feedback on how to make these solutions work best and are excited to test and improve this experience as we learn more.
2. Retail Advertising
Let's turn to the retail industry, where we had a good quarter. Profitability continues to be a theme for retailers. Therefore, solutions like PMax that drive bottom-line value continue to perform well. We also continue to succeed in helping businesses achieve efficient growth and meet their omnichannel goals.
Take Ace Hardware as an example, they leveraged AI-driven search and omnichannel bidding to meet the seasonal demand leading up to Memorial Day. This drove growth in online sales, store visits, and in-store sales, resulting in an 87% YoY increase in omnichannel revenue for Ace store owners through Google ads, creating the largest revenue mix ever. Q2 also brought innovation for consumers and businesses. Shoppers can now try on women's tops on various models like Anthropologie, Everlane, H&M, and LOFT brands. Rich visual content benefits both consumers and businesses.
In fact, products with multiple images have seen an average increase of 76% in click-through rates and a 32% increase in click rates. Our new Product Studio uses Gen AI to create customized eye-catching images for retailers, free of charge, and is dedicated to optimizing performance. We believe this will be a game-changing initiative, especially for small and medium-sized enterprises, as they can now use high-quality images on Google and their own websites without spending too much time or money.
As we continue to make Google a valuable place for businesses to grow and connect with users, Merchant Center Next is another victory. Over the past two years, we have been simplifying it by automating inventory management and providing comprehensive performance insights. Better tools mean better merchant growth and a better user experience.
3. YouTube
Regarding YouTube, as I mentioned before and want to emphasize again, in previous quarters, I have outlined our strategy to empower creators to make a living on our platform with more formats and powerful tools, which will bring more content and high-quality video consumption. Another key focus of the team is to provide better monetization opportunities and gain advertiser support for this incredible ecosystem. In terms of growth, we are focusing on Shorts, CTV, and our subscription services, all of which have shown good growth this quarter.
(1) First, let's talk about Shorts. The momentum in this area remains strong. Watch time and monetization are heading in the right direction. Last year, we launched the ability to run ads on Shorts to drive performance for direct response ad campaigns through video action campaigns, Performance Max, and app campaigns.
Although it is still in the early stages, we are excited about the results. Laneige, a subsidiary brand of Amorepacific, one of Asia's largest cosmetics groups, was an early adopter. In a 10-day test, it focused on achieving video reach and new creative, resulting in a 21% increase in unique user engagement and achieving its goals with more efficient CPM, including Shorts and in-stream.
(2) Next is CTV. The high engagement of the audience and the return on investment for advertisers are driving profitability in the living room. We are very pleased with the growth we have seen and the scale of coverage, results, and relevance we provide. At Brandcast, we announced two new streaming ad products.
30-second ads are the norm in the TV industry, and now YouTube is bringing our advanced audience capabilities and unparalleled coverage to this format. From a holistic perspective, YouTube, according to our measurements from partners Nielsen, TransUnion, and Ipsos MMA, has, on average, a higher return on investment compared to television and other online videos. Take the example of Hershey Company, which has optimized its YouTube strategy over the years. Hershey's brand has been leveraging CTV, efficient AI-powered formats, and platform-specific creatives, making YouTube one of its most important ROI-driving media partners, with over 65% ROI growth from 2018 to 2023. Another highlight is the power of connecting with YouTube, combined with our ongoing efforts to bring Google's best products to all partners.
Our longstanding partnership with Warner Brothers Discovery has been expanded, including collaboration throughout the Android ecosystem, launching Max together, strengthening the mutually beneficial relationship on Google TV, and planning to develop new interfaces together. YouTube has expanded its collaboration with Max, including offering the NFL Sunday Ticket package on YouTube TV, which further emphasizes our joint commitment to delivering the highest quality content and experiences for our customers.
Lastly, I want to reiterate Sundar's words and express immense gratitude to Google employees worldwide for their unparalleled passion and hard work, as well as our customers and partners for their continued collaboration and trust.
III. CFO's Remarks
1. Total costs amounted to $31.9 billion, a 6% YoY increase, with other costs reaching $19.4 billion, an 8% YoY increase. This growth is primarily driven by content acquisition costs, as mentioned in our earnings report, where the overall increase in data center and other operating costs partially offset the decrease in depreciation expenses resulting from the expected change in useful life discussed in the previous quarter.
-
Operating expenses amounted to $20.9 billion, a 4% YoY increase. Operating income reached $21.8 billion, a 12% YoY increase, with an operating profit margin of 29%. I will discuss our expenditure and profit performance in the outlook. Other income and expenses amounted to $65 million, resulting in a net income of $18.4 billion.
-
We achieved $21.8 billion in free cash flow in the second quarter and $71 billion in free cash flow over the past 12 months, reflecting improvements in the company's operating performance and the deferral of certain tax payments, as stated in our earnings report. We hold $118 billion in cash and marketable securities at the end of the quarter.
-
Next, let's look at the performance of our divisions. Last year's financial performance was adjusted based on two changes. First, DeepMind is now reported as part of Alphabet's undistributed corporate costs. Second, we updated our cost allocation method. In the second quarter, we merged Google Research's Brain team with DeepMind to form Google DeepMind. Previously, the cost of the Brain team, which was included in Google Services, is now reported as unallocated corporate costs of Alphabet. We have not adjusted the previous financial performance to reflect this additional change.
5. In the Google Services segment, revenue was $66.3 billion, a YoY increase of 5%. Among them, revenue from Google Search and other advertising was $42.6 billion, a YoY increase of 5%. YouTube advertising revenue was $7.7 billion, a YoY increase of 4%, primarily driven by brand advertising, followed by direct response advertising, reflecting further stability in advertiser spending. Network advertising revenue was $7.9 billion, a YoY decrease of 5%.
- Other revenue was $8.1 billion, a YoY increase of 24%, mainly driven by the launch of Pixel 7a in the second quarter. Finally, ...
7. For the Google Cloud segment, revenue in the second quarter was $8 billion, a YoY increase of 28%. GCP revenue growth remained strong across global industries and products. However, we have seen consumers continue to slow down their spending growth as they optimize expenses. The strong revenue growth of Google Workspace was driven by an increase in seats and average revenue per seat. Google Cloud's operating revenue was $395 million, with an operating profit margin of 5%.
(1) In terms of advertising, we are pleased with the accelerated revenue growth in the second quarter. Our innovative engineering technology provides users with excellent experiences and advertisers with excellent capabilities, combined with our deep marketing expertise, enabling us to achieve sustainable growth. We prioritize improving quality, which translates into better monetization.
(2) Secondly, in terms of other revenue, the strong growth of our YouTube subscription products is driven by significant subscriber growth. You may have seen that we raised the subscription prices for YouTube Music and Premium last week, highlighting the value of the products. Hardware revenue showed strong YoY growth, mainly due to timing changes, with the launch of Pixel 7a in the second quarter and Pixel 6a in the third quarter last year. Looking ahead, timing changes will put pressure on hardware revenue growth in the third quarter. Play achieved positive growth in the second quarter, primarily driven by a steady increase in the number of buyers.
(3) Regarding Google Cloud, although we are still in the early stages, we continue to face challenges of slowing down consumer spending growth in the second quarter as customers optimize expenses.
We maintain a proactive investment approach and continuously redesign the cost structure with a focus on profitable growth.
(4) This includes the employee layoffs announced in the first quarter and the slower pace of hiring, partly due to the reallocation of internal talent to drive growth priorities. According to the improvement in the order of operating profit margin in the second quarter, there are two factors that need attention. First, the benefits brought by the accelerated growth of search advertising revenue in the second quarter. Second, most of the expenses related to the optimization of global office space and employee reduction have been accounted for in the first quarter.
(5) Regarding capital expenditures. In the second quarter, the largest component was servers, including a significant increase in investment in AI computing. The sequential increase in the second quarter was lower for two reasons. First, regarding office facilities, we continue to slow down the pace of renovation and construction from scratch to reflect slower expected personnel growth. Second, there were delays in certain data center construction projects.
The main drivers are to support AI opportunities in various areas of the company, including investments in GPUs and proprietary TPUs, as well as data center capacity. In summary, we are still committed to durably redesigning the cost structure to help create the ability to support these investments and sustain long-term financial value.
IV. Questions And Answers
Q1: I have two questions. The first question is about Sundar. I'm very interested in learning about some early insights and surprises about consumer behavior and how people are using Bard instead of search. What new behaviors or consumer utilities are you most excited about in the next year or so? And what do you think Gemini can offer people?
A - Sundar Pichai
Although it is still in the early stages, we have received very positive feedback from users on both Bard and search generative experiences. I think we are now able to provide users with more in-depth and comprehensive information. This is a very exciting use case. While I wouldn't say there are too many surprises, but for example, in terms of coding, we have learned that, but it is definitely novel.
We already know the potential of Google Lens. We can see that the daily search volume and growth rate have been increasing since we started using this technology. But in Bard, it has been widely accepted, which gives me a sense that, because Gemini is a multimodal product built from scratch, this will be an important area to attract users.
And looking back many years ago, when we were doing universal search, users generally responded well to the fact that we were able to abstract different content types and present them seamlessly.
Q2: The second question is for Ruth. Congratulations on your new position. I remember in the last quarter you mentioned the idea that expenses may grow slower than revenue by 2024. Is this idea still feasible? Please confirm if these comments include the impact of depreciation.
A - Ruth Porat
For your second question, Brian, we are very pleased with the operational performance in the second quarter. We have been saying for some time that we are focused on increasing revenue rather than increasing expenses, and we have achieved this goal for the first time in a long time, including sales costs and overall operating expenses. We are indeed still very focused on durably redesigning our cost base. Q 3: Can you talk about different elements such as open source and closed source, as well as custom chips, and Google's ideas for the widespread development of artificial intelligence in the coming years? What key differentiations do you think Google will bring to the market through its cloud business or consumer products, and how should we think about the increasing significance of differentiation in the field of artificial intelligence in the next few years?
A - Sundar Pichai
This is obviously a big topic. I believe that investments in the field of artificial intelligence involve deep computer science work, our ongoing efforts to attract talent to the company, and the infrastructure we have built from the beginning, including data center switches. Whenever we believe that innovation can provide the best advantage, we choose to do it. We have already done so in the areas of artificial intelligence and chips.
But for us, it is important to stay focused on users and customers and support all the innovation that is needed.
For example, in the cloud space, we have truly embraced an open architecture. We support customers who want to be multi-cloud users when it makes sense.
I think open source plays a crucial role in this ecosystem. Google is one of the major contributors, and if you look at contributions to projects like Android, Chromium, and Kubernetes, you can see that we are one of the largest contributors. So, we will embrace open source and stay at the forefront of technology. I think this will serve us well in the long run.
Q4: Congratulations to Ruth. Ruth, as the new appointee, what direction do you want to drive the organization's development in this new role?
A - Ruth Porat
I want to emphasize that when you ask about the impact, one focus that Sundar and I have discussed is successfully completing the 2024 capital plan and multi-year plan and completing all the very important work that we have underway, which gives the company the opportunity to invest for long-term growth. So, we will continue to execute on those plans. We believe that technology can play an important role in the lives of many people and economies, and we are focused on the impact on economic growth and the opportunities for individuals, organizations, countries, and so on. I think it's a privilege.
I'm very excited about this, especially in this amazing company. So, we will be focused on that and the investments we are making to drive economic growth in various parts of the world.
Q5: Sundar, I'm curious about how you think about integrating generative artificial intelligence more broadly into search, and specifically, what factors do you need to see in order to achieve this?
A - Sundar Pichai
For the generative experience in search, we definitely want to make sure we think deeply from first principles. While it's an exciting new technology, over the past few years, we have been constantly introducing AI innovations into search. This is the next step in that journey. But it's a big change, so we have approached it from first principles. It really gives us an opportunity to not be limited by the way search has worked in the past and allows us to think from the outside in, and I can see that being reflected in the experience. Therefore, I can say that we have exceeded my expectations at this point in time and the feedback has been very positive.
Since the launch of our product, we have seen significant improvements in efficiency and a substantial reduction in latency. We maintain very high standards, and I can confidently say that we are leading in all the metrics we have considered internally. We are extremely satisfied with our performance in this regard.
While this is a deliberate step, we are also building the next major development in search, and so far, I am very pleased with it.
Q6: CapEx is lower than expected. After explaining the reasons, do you still anticipate slightly higher CapEx in 2023 compared to 2022? I know this is a bit forward-looking, but how should we consider the timing of real estate and office optimization in 2023 and 2024?
A - Ruth Porat
Regarding CapEx, I tried to clarify the rhythm of CapEx for two reasons.
Therefore, we want to make it very clear that we do expect to invest more in our technical infrastructure. This will gradually increase in the second half of 2023, consistent with our previous comments, which are driven primarily by investments we have discussed, everything we do with GPUs, and data center capacity. As the pace of innovation accelerates, we want to ensure that we are prepared for various opportunities within Alphabet.
As for the other part of your question regarding real estate optimization, it is one of many workflows that are important as we talk about sustainable redesigning of the company. Our cost base is built to create investment capacity and support long-term sustainable financial value, and we continue to work towards that goal.
Q7: I would like to follow up on some questions about SGE and understand the monetization aspect when deploying SGE. How do you consider this issue when promoting SGE? I know it's still early, but many people are concerned that there may be some resistance in the short term, but the query growth from a more useful product in the long run may offset that. How do you view this situation? Can you share some insights?
A - Sundar Pichai
Perhaps I can provide some specific information here. We have always been committed to delivering this kind of experience to users and ensuring that it works well. For me, as a user, some of the answers to queries are clearly better. It's a clear quality win. So, I think we are definitely moving in the right direction, and we can see that from our metrics and user feedback. What hasn't changed in these experiences is the fact that they are. What excites me is that SGE provides us with another opportunity to serve better and meet these needs.
So, this is clearly an exciting area. We are conducting many experiments, including advertising. We are satisfied with the preliminary results. Therefore, we will continue to improve this experience, but I feel comfortable with what we have seen so far, and we have a lot of expertise to draw upon for these transformations. We will also bring all of this experience here.
Q 8: I would like to ask a question about cloud computing. Despite the stable growth in optimization, could you please discuss the sales opportunities and customer acquisition in this quarter, as well as your thoughts on this? Additionally, did the spending on artificial intelligence in this quarter or the second half of the year boost the total revenue?
A - Sundar Pichai
Thank you for your question. Overall, the field of cloud computing is currently very exciting as customers are very interested in artificial intelligence and they are engaging with us more. Therefore, without commenting on the short-term situation, when I consider the long-term future, I believe the opportunities with AI will expand our potential target market and enable us to win new customers.
Now, we can directly bring massive investments to cloud services. As I mentioned before, we have over 80 models in Vertex, Enterprise, Search, and conversational AI. We are transforming all of them. So, I am very excited about that.
Furthermore, this provides us with an opportunity to offer to our existing customers. For example, if you consider the case of Duet AI in Google Workspace, it is a collection of all our generative AI-driven collaboration features. We can offer it to over 9 million paying Google Workspace customers. Similarly, with Duet AI in Google Cloud, it allows us to go back to our existing customer base and engage in deeper collaborations.
Lastly, I believe AI can help us differentiate our core products. For instance, if you look at how we are integrating AI to drive profound transformations.
So, overall, I am excited and see it as a long-term opportunity. All the investments that Alphabet has made in the field of artificial intelligence, including the work we have done in Google DeepMind and Google Research, apply directly to cloud computing. So, I am very excited about that.
Q 9: One question is about the advertising market, asking Philippe, if you look back, there have been real signs of weakness in the growth of linear TV, advertising agencies, and small digital companies. While the macro backdrop is relatively unclear, you have accelerated growth this quarter. What factors are you focusing on? Why are you growing so fast while others are struggling and growing slowly?
A - Philipp Schindler
Yes, our focus is clearly on continuing to help customers navigate uncertainty or complexity. Many companies are focused on profitability, driving efficiency, and carefully evaluating the effectiveness of their budgets. Our goal is to help them maximize efficiency and generate strong investment returns. I mentioned the solid growth in the retail industry, which has led to increased revenue from search and other sources. We also discussed DR and branding on YouTube. These are the key points I want to address.
Q10: Another question is about R&D investment. Over the past five years, Google has spent over $100 billion on research and development. However, there is a belief that future competition will be extremely fierce and the cost of competition will be very high. Can you talk about how you view these expenses? What recent updates can we expect in terms of growth pace? Are there any factors that could change your research and government spending growth?
A - Sundar Pichai
Perhaps I can talk about our perspective on R&D. Overall, we are committed to advancing deep computer science research and innovation. It is the foundation on which the company is built, and applying it to build new products and services and create value is a virtuous cycle.
If this fundamental argument doesn't change, then of course we will continue to invest as Ruth mentioned,
However, all the efficiency and optimization work we are doing also applies to the field of AI. So, we are incorporating all these perspectives to be able to responsibly execute these investments. But there is no overall change in philosophy or methodology.
Q 11: Can I ask about Performance Max? You have had tremendous success there. Can you talk about the expansion into any verticals or use cases? And how long do you think it will take to reach a point where more automated AI-generated creatives are produced?
A - Philipp Schindler
AI is a fundamental component that allows us to help users, advertisers, and partners at scale. Over the years, we have been committed to significantly improving key advertising components through AI, whether it's bidding, targeting and creatives, or innovations in core advertising customer and publisher experiences. Performance Max is an example where all these elements come together to serve advertisers. They need to provide business objectives and a range of assets, and we can take care of the rest to meet consumer needs and truly deliver return on investment for advertisers.
At GML, we have been building new AI capabilities on top of these foundations for several quarters. In my remarks, I mentioned where we are taking some products from a Gen AI perspective. In a broader sense, whether it's the redesigned asset creation process in Performance Max, or automated asset creation, or Product Studio, we are on the right path towards some truly exciting new innovations in automated asset creation.
**Q 12: You mentioned that at Google, AI has been used to improve ad deployment for many years. Do you think generative AI has simply accelerated your ability to improve the return on ad spend for millions of marketers using Google? If you consider the areas where generative AI will have the greatest impact, could you break down your speculation on where it will have the most significant impact on creativity, audience creation, and activity optimization in the coming years? Where do you think our advertising clients will derive the most significant impact from generative AI?
A - Philipp Schindler
As I mentioned earlier, generative AI is injecting powerful potential into new and existing advertising products, which brings many opportunities. We truly help advertisers make better decisions, solve problems, and enhance creativity, as I mentioned before.
For example, we have introduced a brand new conversational experience in Google Ads, launched an asset creation process in PMax, and mentioned automatic asset creation, Product Studio, and more. When I communicate with clients, they are full of expectations for AI and understand that we may have some challenges. One of the most important questions is, what is the next best step? This is why we released Google Ads AI Essentials on GML. It provides a simple checklist that clients can take immediate steps to unleash the power of AI, including building a data and measurement foundation, taking action with our AI products, and more. At the same time, this also requires a mindset shift within organizations for AI to succeed.
In summary, these are just some examples. If you extend these to the future, in addition to the points Sundar has already mentioned, these are the areas I believe have potential and will bring many opportunities for advertisers.
A - Sundar Pichai
I think all of these were already in place before we achieved multimodal capabilities, and our progress in early-stage innovation is also very exciting. I believe the next few years will be interesting.
Risk disclosure and statement for this article: Dolphin Disclaimer and General Disclosures
