Google conference call: Expected capital expenditure of $75 billion this year, users embrace AI in search, podcasts have become a major advantage for YouTube

On February 4th, Eastern Time, after the US stock market closed, Alphabet announced its fourth-quarter financial data. In the last quarter of last year, Google's search, advertising, and YouTube video services all performed better than expected. However, despite a significant increase in spending, the cloud business, which directly benefits from the application of AI technology, fell short of Wall Street expectations.

Here are the key points from the earnings call of Google's parent company, Alphabet:

1. Despite disappointing performance from Google Cloud in the most recent quarter, Google is still increasing its investment in artificial intelligence. The company announced that it expects capital expenditures to reach an "astonishing" $75 billion this year, with approximately $16 billion to $18 billion in the first quarter. The expected total investment level may vary by quarter, primarily due to delivery and construction timelines.

2. Google Cloud is not invincible. In recent quarters, Google Cloud has been a highlight of Alphabet's performance. However, this quarter's sales fell short of expectations, and the company's market share still lags behind Amazon and Microsoft. Google seems optimistic about this business, with Chief Financial Officer Anat Ashkenazi expecting "employee numbers in key areas like cloud to grow this year," which is particularly notable after years of layoffs.

3. The growth rate of GCP far exceeds that of overall cloud services, with two factors contributing to the slowdown in growth. First, Google had a very strong AdAi deployment quarter in Q4 2023. Second, Q4 2024 indeed saw very strong demand for AI products, ending the year with demand exceeding available capacity. Therefore, Google is in a tight supply-demand situation and is working hard to increase supply.

4. The developer usage of Google's large model Gemini reached 4.4 million in six months. Younger users are embracing AI in search. Google stated that the growth of AI search is particularly strong among all user groups, including younger users. In this AI era, search is performing well. Google believes that by making search more convenient and allowing people to interact and ask follow-up questions more easily, it has the opportunity to drive further growth.

1. Podcasts have become a significant advantage for YouTube. Alphabet's Chief Business Officer Philipp Schindler stated that advertising for the US elections has driven revenue growth for YouTube. Schindler noted that the combined spending by the US Democratic and Republican parties for the 2024 elections is nearly double that of 2020.

2. Google is confident in AI agents. Pichai stated that as technology evolves, AI agents will become a way for Google to serve users in new ways. He mentioned that some features of Project Astra (an agent that processes visual input using smartphone cameras) will be integrated into the Gemini application this year.

Here is the full transcript of the call (translated by AI):

Host: Welcome everyone! Thank you for joining Alphabet's Q4 2024 and fiscal year earnings call. All participants are currently in listen-only mode After the speaker's remarks, there will be a Q&A session. (Host prompt) Now, I will hand the meeting over to today's speaker, Senior Director of Investor Relations Jim Friedland. Please continue.

Jim Friedland, Senior Director of Investor Relations: Thank you. Good afternoon, everyone, and welcome to Alphabet's Q4 2024 earnings call. Joining us today are Sundar Pichai, Philipp Schindler, and Anat Ashkenazi. Now, I will briefly introduce the "safe harbor" provisions. Some of our statements today regarding business, operations, and financial performance may be considered forward-looking statements. These statements are based on current expectations and assumptions, which involve numerous risks and uncertainties. Actual results may differ significantly. Please refer to our 10-K and 10-Q filings, including the risk factors therein. We are not obligated to update any forward-looking statements. In this call, we will present financial metrics in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and non-GAAP. Adjustments between non-GAAP and GAAP metrics have been outlined in today's earnings press release, which has been published on our Investor Relations website. Unless otherwise noted, our comments will be based on year-over-year comparisons. Now, I will hand the meeting over to Sundar.

Sundar Pichai, CEO: Thank you, Jim, and hello everyone. We had another strong performance in Q4, driven by our leadership in artificial intelligence (AI) and our unique full-stack approach. We have made significant progress in computing power, model capabilities, and efficiency improvements. We are rapidly rolling out product enhancements and have gained tremendous momentum in consumer and developer usage. We are pushing the next frontier from AI agents, reasoning, and deep research to cutting-edge video, quantum computing, and more. The company is in a good rhythm and cadence, building, testing, and launching products faster than ever before. This is translating into product usage, revenue growth, and outcomes. In search, the AI overview has now launched in over 100 countries, continuing to drive higher satisfaction and search usage. Meanwhile, the "Circle to Search" feature is now available on over 200 million Android devices. In terms of cloud services and YouTube, we indicated at the beginning of 2024 that we expected combined annual revenue from cloud services and YouTube to exceed $100 billion by the end of the year. We achieved this goal, closing with $110 billion in annual revenue. We are well-positioned for continued growth. So today, I will provide an update on our AI progress and how it is enhancing our core consumer products. Then I will briefly touch on cloud services, YouTube, platforms and devices, and Waymo Let's start with AI. Last quarter, I outlined three differentiated full-stack approaches in AI innovation: our leading AI infrastructure, our world-class research (including models and tools), and the products and platforms that bring these innovations to people at scale. First, AI infrastructure. Our complex global network of cloud regions and data centers provides a robust foundation for us and our customers, directly driving revenue. We have a unique advantage because we develop every component of our technology stack, including hardware, compilers, models, and products. This approach allows us to improve efficiency at all levels, from training and inference to enhancing productivity. In 2024, we broke ground on 11 new cloud regions and data center campuses in places like South Carolina, Indiana, Missouri, and around the world. We also announced plans for seven new submarine cable projects to strengthen global connectivity. Our leading infrastructure is also one of the most efficient in the world. The computing power of Google data centers has nearly quadrupled compared to five years ago, with significant improvements in computing power per unit of electricity. These efficiencies, combined with the scalability, cost, and performance we offer, are why more and more organizations are choosing Google Cloud Platform. In fact, today, the computing power cloud customers use for training and inference has increased more than eightfold compared to 18 months ago. We will continue to invest in our cloud business to ensure we can meet the growing demand from customers.

Second, world-class research, including models. In December, we launched Gemini 2.0, our most powerful AI model to date, built for the agent era. We released an experimental version of Gemini 2.0 Flash, our low-latency, performance-enhanced flagship model. Flash has already been launched in the Gemini application, and tomorrow we will fully roll out 2.0 Flash to developers and customers, along with other model updates. Stay tuned. At the end of last year, we also launched our experimental Gemini 2.0 Flash thinking model. The scaling progress of the thinking model has been rapid, with extremely positive evaluations so far. We are developing better thinking models and look forward to sharing them with the developer community soon. The advancements in Gemini 2.0 in multimodal and native tool usage enable us to build new agents, bringing us closer to realizing the vision of a universal assistant. An early example is Deep Research. It leverages agent capabilities to explore complex topics for you and provides key insights and sources. It was launched in December in the Gemini premium version and is being rolled out to Android users globally. We see our consumer Gemini application gaining significant product momentum, having debuted on iOS last November. We have also opened access to some trusted testers of research prototypes, including the "Project Mariner," which can understand and reason about information on a browser screen to complete tasks, and "Project Astra." We expect to introduce the capabilities of these two projects into the Gemini application later this year We are also excited about the progress of our video and image generation models. VO2 is our state-of-the-art video generation model, and Imagen 3 is our highest quality text-to-image model. These generative media models, along with Gemini, rank at the top of industry leaderboards and have received the highest scores in industry benchmarks. That’s why today, over 4.4 million developers are using our Gemini models, double the number from six months ago. We continue to make breakthroughs in quantum computing research. At the end of last year, we announced Willow, our new state-of-the-art quantum computing chip, which can reduce errors by several orders of magnitude as we scale up using more qubits. Willow is an important step in our journey to build practical quantum computers with real-world applications. This technology is promising, which is why this breakthrough has generated real excitement.

Third, our products and platforms are bringing AI to billions of people worldwide. We have seven products and platforms with over 2 billion users, all utilizing Gemini. This includes search, where Gemini is powering our AI overview. People are using search with AI overviews more, and over time, as people realize they can ask new types of questions, usage is also increasing. This behavior is particularly evident among younger users, who greatly appreciate the speed and efficiency of this new format. We are also pleased to see how "Circle to Search" is driving additional search usage and opening up more types of questions. This feature is also popular among younger users. Those who have previously tried "Circle to Search" are now using it to initiate over 10% of searches. As AI continues to expand the range of questions people can ask, 2025 is set to be one of the biggest years for search innovation in history. Now let me turn to the key highlights of this quarter for cloud services, YouTube, platforms and devices, and Waymo. First, Google Cloud. Our AI-driven cloud services have won us customers like Mercedes-Benz, Mercado Libre, and Servier. The number of first-time commitments in 2024 has doubled compared to 2023. We have also deepened customer relationships. Last year, we signed several strategic deals worth over $1 billion, with the number of deals over $250 million doubling from the previous year. Our partners have further accelerated our growth, with customers purchasing billions of dollars in solutions through our cloud marketplace. We continue to see strong growth in our extensive portfolio of AI-driven cloud solutions. This starts with our AI supercomputers, which offer leading performance and cost in both GPU and TPU. These advantages have helped Citadel with market modeling and training, and have modernized Wayfair's platform, improving performance and scalability by nearly 25% In the fourth quarter, we saw strong adoption of our sixth-generation TPU—Trillium, which offers four times better training performance and three times the inference throughput compared to the previous generation. We also continue to maintain a strong partnership with NVIDIA. We recently delivered a platform based on their H200 to customers. Just last week, we were the first to announce that customers are running on the highly anticipated Blackwell platform. The number of customers using our AI development platform Vertex AI has increased fivefold year-over-year, with brands like International and WPP building new applications and benefiting from our over 200 foundational models. Vertex usage has grown 20 times in 2024, particularly with strong adoption from developers for Gemini Flash, Gemini 2.0, Imagen 3, and the recent VEO. We have also seen strong growth in our AI-driven database, data analytics, and cybersecurity platforms. Customers, including Radisson Hotels, are now using Gemini to search and analyze multimodal data from multiple clouds. Our AI-driven truck intelligence and security operations products help customers like Vodafone and AstraZeneca identify, protect, and defend against threats. Our growing portfolio of AI applications has also seen strong adoption from customers. In the fourth quarter, we launched Google Agent Space, which helps businesses combine data with Google-quality search to create Gemini-driven agents and automate transactions for employees. Additionally, we recently opened our powerful Gemini AI capabilities to all Google Workspace business and enterprise customers to help enhance their productivity.

Turning to YouTube. Nielsen data shows that YouTube continues to rank first in streaming watch time in the U.S., with our streaming share reaching an all-time high. On Election Day alone, over 45 million viewers watched election-related content on YouTube in the U.S. Our early investment in podcasts is paying off. We have integrated podcasts into the core experience of YouTube, particularly in combination with video. According to a recent Edison report, we have now become the most frequently used podcast consumption service in the U.S. This success reflects our long-term investment strategy of moving from mobile to the living room, focusing on emerging trends. We have over 250,000 creators in the U.S. and South Korea who have joined the YouTube Shopping affiliate program. At the end of last year, we expanded YouTube Shopping to three more countries, allowing more creators to share their favorite products with fans and grow their businesses. Philip will discuss YouTube's performance in more detail during the conference call Next is the platform and devices. Google One has performed exceptionally well, being one of our fastest-growing subscription products in terms of both subscriber count and revenue growth. Last month, we announced the first paid Android 16 and new Android updates, including deeper Gemini integration set to launch in the new Samsung Galaxy S25 series. We also recently announced Android XR, which is the first Android platform built for the Gemini era. Android XR is co-developed by Samsung and Qualcomm, aimed at powering the ecosystem for the next generation of extended reality devices, such as headsets and glasses. Lastly, regarding Waymo, it made significant progress last year, safely completing over 4 million passenger trips. It currently averages over 150,000 trips per week and is still growing. Looking ahead, Waymo will expand its network and operational partnerships, entering new markets like Austin and Atlanta this year, and Miami next year. In the coming weeks, Waymo One vehicles will arrive in Tokyo for their first international road trip. We are also developing the sixth generation of Waymo Driver, which will significantly reduce hardware costs. I want to thank our global employees for another outstanding quarter. 2025 will be exciting, and we are ready for it. Philipp, I will hand the meeting over to you.

Philipp Schindler, Senior Vice President and Chief Business Officer: Thank you, Sundar, and hello everyone. I will briefly cover this quarter's performance and then expand on our progress in search, advertising, YouTube, and partnerships, highlighting the impact of AI on our business and customers. Google Services revenue was $84 billion, a 10% year-over-year increase, primarily driven by an 11% year-over-year growth in advertising revenue. Strong growth in search and YouTube advertising partially offset the year-over-year decline in network revenue. In terms of vertical industry performance, search and other revenues grew 13% year-over-year, with financial services leading, followed by retail. YouTube advertising revenue grew 14%, benefiting from strong advertising spending for the U.S. elections, with total spending nearly double that of the 2020 elections.

In the fourth quarter, we saw continued strong growth in search revenue. December brought many exciting updates, and we are rapidly integrating our AI innovations into consumer experiences. We have begun testing Gemini 2.0 in AI Overview and plan to roll it out more broadly by the end of the year. In search, we see people increasingly asking new questions through voice, camera, or previously impossible methods like "Circle to Search." We are providing these benefits to more consumers. Google is already present in over half of the journeys where new brands, products, or retailers are discovered, and by offering new ways to search, we are expanding business opportunities for our advertisers. Shoppers can now take photos of products and quickly find product information, reviews, similar products, and where to buy them at a discount using Lens Lens is used for over 20 billion visual search queries each month, most of which are new. The retail sector performed particularly well this quarter, especially on Black Friday and Cyber Monday, with advertising revenue exceeding $1 billion on both days.

Interestingly, although the U.S. holiday shopping season is the shortest since 2019, retail sales began in October, leading to a shopping season that extended longer than expected. People shop on Google over 1 billion times a day. Last quarter, we launched a redesigned Google Shopping experience, rebuilt from the ground up with AI. In December of this year, the daily active users of Google Shopping in the U.S. increased by about 13% compared to the same period in 2023. In terms of search, travel and sharing another interesting trend, we saw spending expand to "Travel Tuesday." This contributed to a 20% year-over-year increase in revenue for travel advertisers on Cyber Monday and Travel Tuesday. Turning to advertising, we continue to invest in our AI capabilities in media buying, creative, and measurement. As I mentioned earlier, we believe AI will fundamentally change every aspect of the marketing value chain. In the past quarter, we have seen our clients increasingly focused on optimizing their use of AI. For example, Petco used DemandGen campaigns to find new pet parent audiences on YouTube in targeting, creative generation, and bidding. Their return on ad spend was 275% higher than their social benchmarks, with a 74% higher click-through rate.

In media buying, we made YouTube Creator Takeover widely available in the U.S. and will expand it to more markets this year. Creators know their audiences best, and Creator Takeover helps businesses connect with consumers through authentic and relevant content. In terms of creativity, we introduced new control features in PMax and simplified reporting to help clients better understand and reinvest in their best-performing assets. With asset generation in PMax, the creative asset production for Event Ticket Center increased fivefold, saving time and effort. Compared to their period of using manual assets, they also improved their conversion rate by 300%. Finally, in measurement, last week we made Meridian—our marketing mix model—widely available to clients, helping more businesses reinvest in the creative and media buying strategies they know work. According to Nielsen's analysis of marketing mix models, on average, Google's AI-driven video campaigns on YouTube have a return on ad spend that is 17% higher than manual campaigns. Turning to YouTube, we saw strong revenue growth, driven by continued increases in watch time for ad-supported and premium experiences. Our focus remains on building a streaming platform that allows creators to thrive and fully leverage the potential of AI. Expanding our state-of-the-art video generation model, we announced VO2, which creates extremely high-quality videos across a wide range of topics and styles. It is truly inspiring to see how people are trying to use it. We will make it available to creators on YouTube in the coming months We continue to invest in helping YouTube creators collaborate with brands. Now, advertisers worldwide can promote YouTube creator videos and campaigns through Google Ads, and promote across all AI-driven campaign types, allowing creators to tag partners in their brand videos. Sephora used DemandGen's short video-only channel to boost traffic and brand searches for its holiday gift guide campaign, leveraging larger collaborations to find the best gifts. This resulted in an 82% relative increase in search volume for Sephora during the holidays. Short videos continue to rise and are narrowing the gap with long videos. In 2024, the monetization rate of short videos in the U.S. increased by over 30 percentage points compared to long video views, and we expect further progress in 2025. We are making it easier for advertisers to benefit from short videos, whether on large screens or small screens. We are particularly excited about its success on connected TVs, which now accounts for 15% of short video views in the U.S. Louis Vuitton achieved their overall goals by combining ad formats across both long and short video content.

Their short videos exceeded luxury benchmarks, with an average watch time 89% higher for videos of the same length, while their long video content surpassed the benchmark by over 15%, garnering strong engagement among Gen Z and millennials. Looking towards the living room, we continue to rank first in streaming watch time in the U.S., a position that has been maintained for nearly two years according to Nielsen data, with our streaming share reaching an all-time high. Global audiences are watching over 1 billion hours of YouTube content daily on TV in 2024. YouTube has invested for years to adapt to changing consumer behaviors. Current search and living room viewing patterns directly reflect the efforts made over the years to build the right products and partnerships. Creators are now prioritizing high-quality viewing experiences that truly shine on TV screens, inspiring more viewers to tune in. In fact, the number of creators earning revenue primarily from TV has increased by over 30% year-on-year. We have also invested in the podcasting space, with popular shows like Club and Lex Fridman increasingly presented in visual formats. Both YouTube creators and audiences are embracing this trend. In 2024, people will spend over 400 million hours per month watching podcasts solely on living room devices. According to Edison research, YouTube is now the most popular podcast listening service in the U.S. As always, let me conclude with the strong momentum we see in our partnerships; the wide range of services offered by Google is increasingly being recognized. Sundar mentioned our deepening partnership with Samsung. Another expanding partnership is with Citi, which is leveraging Google Cloud to modernize its technology infrastructure to transform employee and customer experiences. By utilizing Google Cloud, it will enhance its digital products, streamline employee workflows, and use high-performance computing to perform millions of calculations daily. This partnership is also driving Citi's generative AI projects in customer service, document summarization, and search to reduce manual processing Speaking of which, let me take a moment to thank the extraordinary commitment of Google employees worldwide, as well as our customers and partners for their continued trust in us. Anat, it's your turn now.

Anat Ashkenazi, Chief Financial Officer: Thank you, Philip. We are pleased with the momentum demonstrated across the business, as Alphabet's revenue for 2024 reached $350 billion, a year-over-year increase of 14%, and a 15% increase at constant currency compared to 2023. My comments will focus on year-over-year comparisons for the fourth quarter, unless otherwise noted. I will start with Alphabet's overall results and then cover our business segment results. I will conclude with comments and expectations for the first quarter and full year of 2025. We achieved strong performance in the fourth quarter, with robust momentum across the business. Consolidated revenue was $96.5 billion, a year-over-year increase of 12%, and a 12% increase at constant currency. Search remains the largest contributor to revenue growth, followed by cloud services. Total operating costs were $40.6 billion, an increase of 8%. Technology costs were $14.8 billion, an increase of 6%. We continue to see a shift in our revenue mix, with Google Search growing at a double-digit rate, while network revenue declined due to its higher technology cost rate. Other operating costs were $25.8 billion, an increase of 9%, primarily due to increased content acquisition costs for YouTube, followed by increased depreciation resulting from our investments in technology infrastructure. The growth in content acquisition and depreciation was partially offset by a year-over-year decline in hardware costs, mainly due to the postponement of our "Made by Google" product launch from the fourth quarter of 2023 to the third quarter of 2024.

In terms of total operating expenses, the year-over-year comparison reflects the $1.2 billion exit costs incurred from actions taken in the fourth quarter of 2023 to optimize our global office space. As previously disclosed, these costs were allocated between other operating costs and operating expenses based on the number of relevant employees. Total operating expenses decreased by 1% to $24.9 billion. R&D investment grew by 8%, primarily due to increases in compensation and depreciation expenses, partially offset by the impact of the office space optimization costs from the fourth quarter of 2023. Sales and marketing expenses decreased by 5%, primarily reflecting last year's optimization costs, as well as declines in compensation and advertising promotion expenses due to the Pixel launch being moved from the fourth quarter to the third quarter. General and administrative expenses decreased by 15%, reflecting changes in our charitable donation timing and last year's optimization costs. Operating income grew by 31% this quarter to $31 billion, with an operating margin increase of 32%, representing a 4.6 percentage point margin expansion. Net income grew by 28% to $26.5 billion, with earnings per share increasing by 31% to $2.15. We achieved $24.8 billion in free cash flow in the fourth quarter, with a total of $72.8 billion in free cash flow for the full year of 2024 As of the end of the quarter, we had $96 billion in cash and cash equivalents. Turning to the results by business segment. Google Services revenue grew by 10% to $84.1 billion, reflecting strong momentum in Google Search and YouTube advertising. Google Search and other advertising revenue increased by 13% to $54 billion. The strong performance in search was again broadly distributed across various verticals, with the financial services sector leading due to strong performance in the insurance industry, followed by retail. YouTube advertising revenue grew by 14% to $10.5 billion, driven by brand advertising and direct response advertising. Network advertising revenue was $8 billion, down 4%.

In the fourth quarter, our year-over-year comparisons for all advertising revenue were impacted by the growth in advertising revenue in Q4 2023, partly due to strong performance from retailers in the Asia-Pacific region. Subscription platform and device revenue grew by 8% to $11.6 billion, primarily reflecting growth in subscription revenue, partially offset by the timing of our "Made by Google" device launches being moved from Q4 2023 to Q3. We continue to see significant growth in subscription products, mainly due to an increase in paid subscribers for YouTube TV, YouTube Music Premium, and Google One. In terms of platforms, we saw a slight increase in the growth rate of the Play Store, primarily due to strong growth in the number of buyers. Google Services operating revenue grew by 23% to $32.8 billion, with operating margin rising from 35% to 39%, representing significant margin expansion. Turning to the Google Cloud segment, this segment continued to achieve very strong results this quarter. Revenue grew by 30%, reaching $12 billion in Q4, reflecting growth in core GCP products, AI infrastructure, and generative AI solutions. It is worth emphasizing that GCP's growth rate far exceeds that of the overall cloud services market. The healthy growth of Google Workspace was primarily driven by an increase in average revenue per seat. Google Cloud operating revenue grew to $2.1 billion, with operating margin rising from 9.4% to 17.5%. We are pleased with the cloud team's efforts to provide valuable solutions to customers, drive revenue growth, and maintain a continued focus on improving cloud business efficiency. As for other investments, Q4 revenue was $400 million, with an operating loss of $1.2 billion. The year-over-year decline in revenue and increase in operating loss primarily reflect milestone payments made in Q4 2023 for one of the other investment projects. Turning to Alphabet-level activities, the largest component of this line item is our investment in AI research and development activities that support the entire Alphabet. Just a reminder, Alphabet-level activities include almost all severance costs incurred due to layoffs as well as office space costs. The largest factor in the year-over-year comparison for Q4 2024 is the $1.2 billion expense from Q4 2023, almost entirely related to office space optimization Regarding capital expenditures (CapEx), our capital expenditures for the fourth quarter report amounted to $14 billion, primarily reflecting our investments in technology infrastructure, with the largest portion being server investments, followed by data centers, to support the growth of Google services, Google Cloud, and Google DeepMind businesses. In the fourth quarter, we returned value to shareholders in the form of $15 billion in stock buybacks and $2.4 billion in dividend payments. Overall, we returned nearly $70 billion in value to shareholders in 2024. Turning to 2025, I would like to comment on several factors that will impact our business performance in the first quarter and the full year of 2025. First, in terms of revenue, I will highlight two items that will significantly impact the company's revenue in the first quarter. The first is the impact of foreign exchange rates. Based on current spot rates, we expect the appreciation of the dollar against major currencies to pose greater headwinds to our revenue in the first quarter of 2025 compared to the fourth quarter of 2024. The second is the impact of the leap year. We expect that the revenue in the first quarter of 2025 will face headwinds due to one less day compared to the first quarter of 2024. In terms of our business segments, Google services advertising revenue in 2025 will be influenced by our strong performance in the financial services sector throughout 2024. In cloud services, given that revenue is related to the timing of new capacity deployments, we may see fluctuations in cloud revenue growth rates based on the timing of new capacity coming online in 2025. Turning to investments, first is our expectation for capital expenditures for the full year of 2025. As we mentioned in the third-quarter conference call, as we expand our AI efforts, we expect to increase investments in capital expenditures for technology infrastructure, primarily in servers, followed by data centers and networks. We anticipate investing approximately $75 billion in capital expenditures in 2025, with about $16 billion to $18 billion in debt in the first quarter. The expected total investment level may vary by quarter, primarily due to delivery and construction schedules.

In terms of expenses, first, the increased investment in capital expenditures over the past few years will put pressure on the profit and loss statement (P&L), primarily in the form of higher depreciation. In 2024, we saw a 28% year-over-year increase in depreciation as we invested more in technology infrastructure assets. Given the increased capital expenditure investments over the past few years, we expect the depreciation growth rate to accelerate in 2025. Secondly, we expect an increase in the number of employees in key investment areas such as AI and cloud services in 2025. As you just heard from Sundar, we are delivering products and solutions to customers at an astonishing pace, building, testing, and launching products faster than ever before. As I mentioned in the third-quarter conference call, we are doing this while also focusing on further improving the efficiency of our operations. Before we begin the Q&A, I would like to review the financial results for the year. For the full year of 2024, revenue grew by 14%, or $43 billion, reaching $350 billion Google services and Google Cloud continue to achieve double-digit revenue growth, accompanied by margin expansion. The combined revenue from YouTube and cloud services reached an annual run rate of $110 billion by the end of the year. In 2024, we achieved a total revenue of $112 billion, a 33% increase from 2023. We are pleased with the momentum we see in AI innovation and monetization. We have been using AI in our advertising business to improve performance for over a decade, and cloud services are generating billions of dollars in annual revenue from AI infrastructure and generative AI solutions. We are also excited about the potential to bring new experiences to users, which will provide additional monetization opportunities. I look forward to sharing our progress throughout the year. Sundar, Philip, and I will now answer your questions.

Q&A Session

Host: Thank you. (Host prompts) The first question we received is from Brian Nowak of Morgan Stanley. Your line is now open.

Brian Nowak, Analyst: Thank you for taking my question. I have two questions, one for Sundar and one for Anant. Sundar, regarding search, it seems there is still a lot of room for improvement in the search space with the development of generative AI and agent technologies. Could you briefly outline your macro vision for the continued evolution of search products over the next few years, and how you see search products staying at the forefront of users' information retrieval while providing more engagement and monetization opportunities for users and advertisers? The second question, Anant, about 90 days ago, you mentioned further improving operational expense (OpEx) efficiency and streamlining in that area. Could you provide examples of what further efficiency potential exists in OpEx, aside from the depreciation and amortization (D&A) increase we will see in 2025? Thank you.

Sundar Pichai, CEO: Thank you, Brian. Regarding search, this has clearly been an ongoing journey. The AI overview is the next step, and it is actively unfolding. As we pointed out, relevant metrics are performing well, and we are clearly leveraging that experience to continuously introduce better models, expand the range of applicable queries, and so on. But there is more to come in the future. I believe we will introduce AI in a more powerful multimodal way, such as what we have already done with Lens and "Circle to Search," and you can imagine future projects like "Project Astra." You can also envision the work we are doing in Gemini Deep Research, which greatly expands the types of use cases that search can apply to, which may not always yield immediate answers but may take some time to respond. These are all areas we are exploring, and you will see us launch more new experiences for users in 2025 Therefore, I do believe that there is still a lot of room for development to unlock in the AI field.

Anat Ashkenazi, Chief Financial Officer: Thank you. Regarding the question you mentioned about how we view future leverage, and some comments I made in the last meeting, I certainly see opportunities for further productivity and efficiency improvements, which is a priority area for us. We will do this to ensure that we continue to invest in areas like AI and cloud services where we see sustained growth potential. I will continue to focus on the areas I mentioned earlier, including technology infrastructure. The $75 billion capital expenditure I mentioned earlier this year will largely go towards our technology infrastructure, including servers and data centers. Therefore, it is crucial to ensure that we make these investments in the most efficient way possible. The second is managing the growth in employee numbers; we will invest in growth areas like AI and cloud services, but it will also be very important to balance this growth across the company. Optimizing our real estate footprint is another area I mentioned earlier. We continue to focus on this. Additionally, we are considering how to streamline our organizational structure. We have previously mentioned integrating similar areas, and Sundar talked about consolidating some AI research teams so that we can operate at a faster pace, but we are also considering how to operate internally within the organization, using our own AI tools to manage the business, whether it’s using AI to write code as Sundar mentioned in the last meeting, or using AI tools to run some of our key processes. We are considering all these aspects. This will be an ongoing effort, not just a quarterly thing. It will span the entire year, and we will continue to focus on this to support growth in other areas.

Host: The next question we received is from Doug Anmuth at JP Morgan. Your line is now open.

Doug Anmuth, Analyst: Thank you for taking my question. I have one question for Philipp and another for Anat. First, Philipp, could you please elaborate on the expansion of ad placements in the AI overview, and any other insights you may have learned in the fourth quarter? I’m particularly curious if you are placing ads on a higher proportion of commercial queries? And can you say that your monetization level in existing searches is roughly comparable? Secondly, Anat, regarding the growth of cloud services, it seems to have slowed slightly from the third quarter to the fourth quarter, but it sounds like you also hinted at capacity constraints in the fourth quarter. I’d like to explore this further. Is that accurate? And can you say that if there were more capacity, the revenue growth from cloud services could be higher? Thank you.

Philipp Schindler, Senior Vice President and Chief Business Officer: Regarding your first question, first, the AI overview, I’m pleased to see it continue to drive higher user satisfaction and search usage. As you know, we recently launched ads in the AI overview on mobile devices in the U.S., which expanded on our previous launches of ads above and below the search results As I mentioned earlier, for the overall AI overview, we are actually seeing a monetization level comparable to existing search, which I believe provides us with a very strong foundation on which we can innovate further.

Anat Ashkenazi, Chief Financial Officer: Regarding cloud services, first, I am pleased that we achieved $12 billion in revenue at the end of the quarter, with a year-over-year growth of 30%, which is a very impressive growth. As I mentioned in my prepared remarks, the growth rate of GCP is far higher than that of overall cloud services. There are two factors regarding the slowdown in growth. First, we had a very strong AdAi deployment quarter in Q4 2023. Secondly, as you mentioned, we did see very strong demand for our AI products in Q4 2024, and we ended the year with demand exceeding available capacity. Therefore, we are in a tight supply-demand situation, and we are working very hard to increase more capacity. As I mentioned, we are increasing capital expenditure investments in 2024 and will continue to increase in 2025, bringing more capacity throughout the year. Thank you both.

Host: Your next question comes from Eric Sheridan of Goldman Sachs. Your line is now open.

Eric Sheridan, Analyst: Thank you for taking my question. I have just one question. Sundar, there was news from China over two weeks ago, and I think investors have been asking a lot about the long-term cost curve of AI as it transitions from the infrastructure layer to the application layer, or from training to inference, and perhaps even custom silicon becoming more dominant throughout the topic. I would love to hear your thoughts on the news that came out a few weeks ago and what it might mean for Alphabet in the long term.

Sundar Pichai, Chief Executive Officer: Thank you, Eric. First, there are many perspectives on DeepSeek. First of all, I think it’s an outstanding team. I believe they have done a very, very good job. It’s clear to us that over time, there will be cutting-edge model development, but you can really improve efficiency to serve these models well. If you look at one of the shining areas of the Gemini model, it’s in the frontier of cost performance and latency. If you look at these three attributes, I believe we are at the forefront in this area. I would say our 2.0 Flash model and 2.0 Flash thinking model are among the most efficient models, including compared to DeepSeek's V3 and R1. I think this is largely due to our investment in developing and optimizing the entire stack, our obsession with the cost per query, and all of this I believe serves us well in handling the workloads of serving billions of users, whether in our products or in cloud services What I want to say is that if you look at the trends over the past three years, the proportion of spending on inference has been increasing compared to training, which is a good thing because clearly, inference is meant to support companies with good returns on invested capital (ROIC). Therefore, I think this trend is positive. I believe that inference models, if any, will accelerate this trend because they are clearly expanding in the inference dimension as well. So, I think part of the reason we are so excited about AI opportunities is that we know we can drive extraordinary use cases because the actual cost of using it will continue to decline, making more use cases possible, and that is the opportunity space. This is a huge opportunity, and that is why you see us investing to seize this moment.

Host: Thank you. Your next question comes from Michael Nathanson of MoffettNathanson. Your line is now open.

Michael Nathanson, Analyst: Thank you. I have two questions, one for Philipp and one for Anant. First, Philipp, my question is that we are starting to see more AI tools on e-commerce sites, such as AI recommendation studies on Google Shopping. Could you talk about how these products and other AI tools are affecting shopping behavior and what impact this has on monetization? Secondly, I want to ask a question about long-term capital intensity. It sounds like there are some constraints in construction, but how should we think about modeling future capital intensity? And what are you looking for as you consider whether this is the right level of spending? Thank you.

Philipp Schindler, Senior Vice President and Chief Business Officer: That's a great question. We have been leveraging our advancements in AI to make searching for products on Google easier, which is evident. In the fourth quarter, we actually launched a completely revamped Google Shopping experience that we rebuilt from the ground up using AI. People shop on Google more than 1 billion times a day. Last quarter, we launched this brand new Google Shopping experience. In December, we saw that the daily active users of Google Shopping in the U.S. increased by about 13% compared to the same period last year. So this is a great development. Regarding the new Google Shopping experience, specifically to your question, it is able to intelligently show users the most relevant products, helping to accelerate and simplify your research process. You will receive an AI-generated brief that includes key points to consider while you search, along with products that may meet your needs. So shoppers generally want low prices. The new page not only includes deal-finding tools like price comparison, price insights, and price tracking, but also a new, dedicated personalized deals page where you can browse deals curated for you, all built on AI. Therefore, we believe this is a very interesting opportunity Anat Ashkenazi, Chief Financial Officer: Regarding the question of capital expenditure, I think you may have mentioned two issues within it. One is capital intensity, and the other is the return on invested capital. First of all, we are certainly looking forward, but we are managing in a very responsible way, with a very strict and even internal governance process, considering how we allocate this capacity and what we need externally to support customer demand, and this is also true in the Google - Alphabet business. As you just heard in the comments about cloud services, our demand indeed exceeds our available capacity. Therefore, we will work hard to address this issue and ensure that we bring in more capacity. We have a very broad business, and we can reallocate capacity, whether through Google services or Google Cloud to support, as I said, whether it's search, Google DeepMind, or Google Cloud customers, we can do this in a more efficient way. We also examine every investment we make to ensure that we are doing it in the most cost-efficient manner to optimize our data centers. As you know, our strategy primarily relies on our own design and construction of data centers. Therefore, they are industry-leading in terms of cost and large-scale power efficiency. We have our own custom TPUs, which are tailored for our own workloads. Therefore, they provide excellent performance in terms of capital expenditure efficiency. So, when we decide how to advance capital investments in the coming years, we will consider all these factors.

Michael Nathanson, Analyst: Thank you.

Host: Your next question comes from Mark Shmulik of Bernstein. Your line is now open.

Mark Shmulik, Analyst: Yes, thank you for taking my question. Sundar, I want to follow up on Brian's earlier question. With your own Project Mariner efforts and the recent releases from competitors, it seems there is suddenly very strong momentum in the AI consumer agent space, seemingly catching up to the old vision of Google Duplex. I think when you look forward a few years, where do you think consumer agents will go, and what does that really mean for Google Search, aside from Lens? Is there enough room for both to thrive together, or will they ultimately conflict? Thank you.

Sundar Pichai, CEO: First of all, I think we are definitely seeing a lot of progress in the underlying capabilities of these models. Gemini 2.0 is certainly built with the perspective of enabling more agent use cases. So, I actually - we are definitely seeing internal progress, and I think we will be able to provide our users with more agent experiences. Look, I actually think all of this is expanding the opportunity space Historically, we have always had information-related use cases, but now you can take action on your information needs in a deeper way. When we talk about products like Google Assistant, this has always been our vision. Therefore, I believe the opportunity space is expanding. I think there is a lot of room here, and it is by no means a zero-sum game. I believe there are many new types of use cases that have room to thrive. For us, we clearly see additional use cases that we can start solving for Google Search users. All early AI work indicates that users will respond positively to these improvements. Therefore, I am optimistic about the future.

Host: Your next question comes from Ross Sandler at Barclays. Your line is now open.

Ross Sandler, Analyst: Okay. I have a question about infrastructure and another about revenue expectations. First, if we look at the raw cost of generating inference tokens on your TPU architecture, rather than the API pricing we see for products like Gemini and GPT-4, do you think you are more cost-efficient in generating 1 million tokens compared to your peers in the cloud services space? Do you see this as an advantage as everything shifts towards inference?

Secondly, Anant, you mentioned that the strong performance in the financial services category will become an issue in 2025. Could you quantify that? Is it similar to the situation you previously mentioned regarding outbound advertisers in the Asia-Pacific region? Can you provide some numbers regarding this headwind? Thank you very much.

Sundar Pichai, CEO: Ross, starting with the DPU project, our V1 is actually an inference chip. Therefore, we have always taken an end-to-end stack approach so that we can achieve strong differentiation in terms of cost, latency, and performance, whether in the frontier areas we mentioned. I believe our full-stack approach and TPU efforts provide meaningful advantages. We plan to continue this, and you have seen that. I know you are asking about costs, but our pricing also reflects this differentiation. This is also why we are able to launch products like the Flash model, which has a very attractive value proposition, and this is also driving developer growth. We have doubled the number of developers in about six months to 4.4 million. Vertex usage has grown 20 times over the past year. All of this is a direct result of this strategy.

Anat Ashkenazi, CFO: Regarding the strong performance in the financial services category that I mentioned, it is mainly related to structural changes in the insurance sector. Therefore, it is more specifically reflected in the financial services area, particularly in the insurance segment. We have seen this sustained performance, but it is a one-time growth, and then we have seen this trend throughout the year I won't provide the specific numbers we expect to see in 2025, but I am pleased with the strong performance we are seeing across industries, including retail, where we ended the year with strong momentum. If anything, I want to emphasize that when you consider this year, the foreign exchange impact I mentioned, as well as the fact that we had one less day of revenue in the first quarter, are factors that need to be noted.

Host: Your next question comes from Justin Post at Bank of America. Your line is now open.

Justin Post, Analyst: Okay, thank you. I have two questions for Philipp. First, you mentioned that the AI overview has driven an increase in search usage. I just wanted to know if overall search usage has accelerated as you integrate more AI? I know competitors are seeing rapid traffic growth in AI, but I wanted to know if you are really seeing a true increase in the total information gathering?

Secondly, regarding YouTube, considering the shift from more professional content to user-generated content, how has this impacted your usage, and how do you view the impact of this shift on margins? Thank you.

Sundar Pichai, CEO: Regarding overall search usage, our metrics are healthy. We continue to see search usage grow year over year. Of course, within that, the growth of the AI overview is even stronger, especially across all user demographics, including younger users. So, it has been well received. But overall, I think search is performing well in this AI era. As I mentioned earlier, we have more innovations coming this year. I believe the product will evolve further. I think as you make search more convenient, allowing people to interact more easily, ask follow-up questions, etc., we have the opportunity to drive further growth.

Philipp Schindler, Senior Vice President and Chief Business Officer:** Regarding your YouTube question, YouTube ads performed very healthily overall in the fourth quarter, with brand ads and direct response ads driving growth. The U.S. election ads drove brand revenue growth, and the spending we saw was nearly double that of 2020. I mentioned this. We also received strong contributions from finance, retail, and technology sectors. So overall, the operational metrics are strong, and watch time continues to grow robustly, especially in key monetization areas like short videos and living rooms. Regarding the user-generated content (UGC) aspect you specifically mentioned, we have a very close relationship with creators, and we have always said that creators are at the core of YouTube's success. They are the most important thing we care about, and this strong creator relationship gives us confidence. Today, we have over 3 million channels that have joined the YouTube Partner Program, which is an incredible program. Therefore, we are very confident in our position and future development Host: The last question we received is from Ken Gawrelski of Wells Fargo. Your line is now open.

Ken Gawrelski, Analyst: Thank you very much. I have two questions. I want to focus on Gemini and consumer engagement. Sundar, there have been reports that you have an ambitious goal to significantly increase the usage of Gemini by the end of 2025. I have two questions regarding this. First, how should we think about the approach you will take to achieve this goal? Is it through more aggressive marketing of Gemini as an independent product, or by integrating it more closely into existing experiences, whether it be search, email, maps, etc.? Secondly, how should we think about the future monetization opportunities for Gemini? Currently, it is primarily a premium subscription service or a free service. Over time, do you see potential for an advertising component? Please share any relevant insights. Thank you.

Sundar Pichai, CEO: First of all, we have strong growth momentum for the Gemini application in the second half of 2024. Part of this is because we have made it more accessible. For example, we launched a dedicated app on iOS, which has received very positive acceptance and has indeed gained significant traction. So, driving natural growth through product launches. We just launched our 2.0 series models last week. So, 2.0 Flash, I think it’s one of the most powerful models you can access for free. This has clearly also played a role in driving usage. So, we have been iterating quickly there. We have made several key innovations there. Gemini Live has definitely been well received by users, and Gemini Deep Dive has also been beneficial for advanced users. So, I think the combination of innovation and continuous product improvement is driving a lot of usage, and we will be launching more this year. We are obviously partnered with Samsung. So, there are other things that will contribute to this. In terms of monetization, of course, we are currently focused on the free tier and subscription services. But as you see at Google, we always want to prioritize user experience, and we do have some good ideas around native advertising concepts, but you will see us prioritize user experience. But we are indeed committed to making the product serve billions of users, and advertising has always been an important aspect of that strategy. So, as you see on YouTube, we will provide choices over time. But this year, I think you will see us focus on the subscription direction.

Ken Gawrelski, Analyst: Thank you Host: Thank you. This concludes our Q&A session for today. I would like to hand the meeting back to Jim Friedland to see if he has any further remarks.

Jim Friedland, Senior Director of Investor Relations: Thank you all for participating today. We look forward to connecting with everyone again in the Q1 2025 conference call. Thank you, and have a pleasant evening.

Host: Thank you, everyone. The conference call is now over. We appreciate your participation. You may disconnect at any time