Google (Minutes): Cloud slowdown is due to insufficient investment, more investment is needed in the future!

The following is the summary of Google's Q4 2024 earnings conference call. For the financial report interpretation, please refer to "Google: $75 Billion Crazy Investment in AI, Big Brother Goes Crazy Beyond Meta"

1. Core Information Review of Google's Financial Report:

2. Performance Highlights

(1) Financial Overview

1. Overall financial performance is excellent: In 2024, Alphabet's revenue reached $350 billion, a year-on-year increase of 14%, and a 15% increase when calculated at constant exchange rates. The free cash flow for the entire year of 2024 reached $72.8 billion, with $24.8 billion in free cash flow realized in the fourth quarter, holding $96 billion in cash and cash equivalents at the end of the quarter.

2. Comprehensive growth across all business segments

Google Services: Overall revenue grew by 10% to $84.1 billion. Among them, Google Search and other advertising businesses performed outstandingly, with revenue increasing by 13% to $54 billion. The financial services sector (especially insurance) and retail became the main drivers of growth, thanks to the company's continuous optimization of search technology and advertising strategies, which can accurately match user needs and advertiser goals.

YouTube advertising revenue grew by 14% to $10.5 billion, driven by both brand advertising and direct response advertising, reflecting YouTube's strong appeal in the advertising market.

Although online advertising revenue was $8 billion, a year-on-year decrease of 4%, subscription platform and device revenue grew by 8% to $11.6 billion, mainly due to the increase in paid users of subscription products such as YouTube TV, YouTube Music Premium, and Google One, as well as strong growth in the number of buyers on the Play platform, which somewhat offset the decline in online advertising revenue.

Operating profit for Google Services increased by 23% to $32.8 billion, with the operating profit margin rising from 35% to 39%, significantly enhancing profitability.

Google Cloud: Revenue growth momentum is strong, increasing by 30% to $12 billion. Google Cloud Platform (GCP) achieved growth in core GCP products, artificial intelligence infrastructure, and generative artificial intelligence solutions, with growth rates exceeding the overall average of the cloud services market, indicating the company's increasing competitiveness in the cloud services sector.

Google Workspace also achieved healthy growth, mainly due to the increase in average revenue per seat, thanks to the company's continuous enhancement of product features and service quality to meet the diverse needs of enterprise customers.

Google Cloud's operating profit increased to $2.1 billion, with the operating profit margin significantly rising from 9.4% to 17.5%, achieving a qualitative leap in profitabilityOther Businesses: Despite fourth-quarter revenue of $400 million and an operating loss of $1.2 billion, the decline in revenue year-on-year and the increase in operating loss were mainly due to the special factor of milestone payments made for a business within other businesses in the fourth quarter of 2023, indicating that the overall business is still in the exploration and development stage.

Shareholder Returns: In the fourth quarter, $15 billion was returned to shareholders through stock buybacks and $2.4 billion in dividend payments. Nearly $70 billion will be returned to shareholders for the entire year of 2024.

(II) Business Progress

1. Significant Achievements in Artificial Intelligence

Infrastructure Upgrades: In 2024, the company launched the construction of 11 new cloud regions and data center parks in South Carolina, Indiana, Missouri, and globally, while announcing plans for 7 new submarine cable projects to strengthen global network connectivity. The computing power of Google data centers has increased nearly fourfold compared to five years ago, and cloud customers' computing power consumption for training and inference has grown more than eightfold compared to 18 months ago, providing strong hardware support for the development of artificial intelligence business.

Model Innovation Breakthroughs: In December, Gemini 2.0 was launched, which is the company's most capable artificial intelligence model to date, built for the "agent era." An experimental version of Gemini 2.0 Flash was also launched, featuring low latency and enhanced performance, which has been rolled out in the Gemini application and made fully available to developers and customers, along with other model updates.

Additionally, the experimental Gemini 2.0 Flash thinking model has made rapid progress and received positive reviews. Video and image generation models such as Vo2 and Imagen3 rank at the top of industry charts, attracting over 4.4 million developers to use the Gemini model, double the number from six months ago.

In quantum computing research, the announcement of Willow, a next-generation quantum computing chip, marks an important step toward building practical quantum computers by reducing errors.

Product Application Expansion: The company's 7 products and platforms with over 2 billion users are all utilizing Gemini, such as the AI overview in search powered by Gemini, which has been launched in over 100 countries, driving higher user satisfaction and search usage rates.

The "Circle to Search" feature is available on over 200 million Android devices, stimulating additional search usage. Applications like deep research leverage agent capabilities to help users explore complex topics, with related features gradually being introduced into the Gemini application.

2. Other Business Segments Flourishing

Google Cloud: Secured important clients such as Mercedes-Benz and MercadoLibre, with the number of commitments in 2024 doubling compared to 2023, and signed multiple strategic deals exceeding $1 billion, with the number of deals over $250 million also doubling from the previous yearIn AI-driven cloud solutions, there has been strong growth across various areas, including AI supercomputers, databases, data analytics, and cybersecurity platforms. For instance, the sixth-generation TPU Trillium has been widely adopted, and the number of customers using the AI development platform Vertex AI has increased fivefold year-on-year, with usage growing twentyfold.

Last year, several strategic deals worth over $1 billion were signed, with the number of deals exceeding $250 million doubling compared to the previous year. Partnerships further accelerated growth with customers, who purchased billions of dollars' worth of solutions through Google's cloud marketplace. The robust growth in the extensive portfolio of AI-driven cloud solutions starts with our AI supercomputers, which offer leading performance and cost in both GPU and TPU.

These advantages helped Citadel model the market and train, and enabled Wayfair to modernize its platform, improving performance and scalability by nearly 25%.

In the fourth quarter, the strong adoption of the sixth-generation TPU Trillium saw a fourfold increase in training performance and a threefold increase in inference throughput compared to the previous generation. We will continue to maintain a strong partnership with NVIDIA in the future. Just last week, Google was the first to announce customers running on the highly anticipated Blackwell platform.

AI-driven intelligence and security operations products help customers like Vodafone and AstraZeneca identify, protect, and defend against threats. The growing portfolio of AI applications has also seen strong customer adoption.

YouTube: Maintains a leading position in streaming watch time in the U.S., with streaming share reaching an all-time high. Investments in podcasts have paid off, making it the most frequently used podcast consumption service in the U.S. The YouTube Shopping affiliate program has seen an increase in creator participation and has expanded to multiple countries. The monetization rate of Shorts has improved, achieving success on internet television, accounting for 15% of Shorts viewership in the U.S.

Platforms and Devices: Google One subscription products have seen rapid growth, showing excellent performance in both subscriber numbers and revenue. The Android system continues to update, launching the first beta of Android 16, along with new Android updates, including deeper Gemini integration in the new Samsung Galaxy S25 series, and the release of the Android XR platform built specifically for the Gemini era.

Waymo: Significant progress has been made in the autonomous driving field, with safety services exceeding 4 million passenger trips, averaging over 150,000 trips per week and still growing. Plans are in place to enter new markets such as Austin and Atlanta this year, with Miami set for next year, and vehicles will arrive in Tokyo for the first international road trip in the coming weeks, while developing the sixth-generation Waymo driver to reduce hardware costs.

(3) Future Outlook

Challenges Ahead: In the first quarter of 2025, the company's revenue will be affected by two factors: foreign exchange rates and the leap year. Based on current spot exchange rates, the appreciation of the dollar against major currencies will pose greater resistance to revenue; the revenue in the first quarter of 2025 will also face some pressure due to having one less day compared to the first quarter of 2024, which is a leap yearIn addition, Google's advertising revenue from services in 2025 will be influenced by the strong performance in the financial services sector in 2024. The growth rate of cloud service revenue may fluctuate due to the timing of new capacity coming online.

Investment Plan: The company plans to increase investment in technology infrastructure in 2025, with expected capital expenditures of approximately $75 billion, primarily for servers, data centers, and network construction, with about $16-18 billion in the first quarter.

At the same time, it is expected that the number of employees in key investment areas such as artificial intelligence and cloud services will increase in 2025 to support rapid business growth. However, with the increase in capital expenditures, depreciation expenses will put greater pressure on the income statement, and the depreciation growth rate is expected to accelerate in 2025.

Improving Operating Expense Efficiency: The company has various ways to improve operating expense efficiency, including ensuring the effectiveness of technology infrastructure investments, managing employee growth reasonably, optimizing real estate usage, streamlining organizational structure, and utilizing artificial intelligence tools to manage business processes. This is an ongoing effort aimed at supporting continuous growth across the company's various business areas.

III. Q&A Section

Question 1: What is the vision for search products in the coming years, and how will you maintain the advantage of search products to bring more engagement and profit opportunities for users and advertisers? Additionally, what is the potential for improving efficiency in operating expenses aside from the increase in depreciation and amortization in 2025?

The development of search is a long-term process, and AI overviews are being advanced. In the future, AI will be introduced in a more powerful and multimodal way, expanding the types of search use cases through projects like Lens, CircletoSearch, ProjectAstra, and Gemini Deep Research. In 2025, users will experience new opportunities to explore AI in the search field.

There are further opportunities to improve company efficiency, focusing on: the effectiveness of technology infrastructure investments; managing employee growth while controlling overall growth when investing in AI and cloud; optimizing real estate utilization; streamlining organizational structure; and utilizing AI tools to manage business, such as coding and running key processes. This is a year-round effort to support business growth.

Question 2: Please elaborate on the expansion of advertising in the AI overview and the relevant experiences in the fourth quarter, including whether it has been promoted to more commercial queries and how the profit levels compare to existing searches.

The AI overview has performed well, driving user satisfaction and increased search usage. Recently, ads in the AI overview were launched on mobile devices in the U.S., based on previous promotional foundations. Overall, the profit level of the AI overview is roughly the same as that of existing searches, providing a solid foundation for further innovation.

Question 3: What are the reasons for the slight slowdown in cloud business growth from the third quarter to the fourth quarter? Is it due to capacity constraints, and if capacity were sufficient, would revenue growth be higher?

The cloud business generated $12 billion in revenue this quarter, a 30% year-over-year increase, with GCP growth exceeding overall cloud business growth. The slowdown is partly due to strong core deployments in the fourth quarter of 2023 and strong demand for AI products in the fourth quarter of 2024, leading to capacity shortages and a tight supply-demand situation. The company is working to increase capacity, having increased capital expenditure investments in 2024, and will continue to do so in 2025.Question 4: How to view the news about artificial intelligence coming from China and its long-term significance for Alphabet.

The relevant teams have performed excellently. The Gemini model has advantages in cutting-edge cost performance and latency, with the 2.0 Flash model and 2.0 Flash thinking model being among the efficient models. The company's full-stack development and end-to-end optimization, along with control over query costs, have prepared the products and cloud services well. The proportion of inference spending has increased over the past three years, and inference models will accelerate this trend. The decrease in AI usage costs will bring more use cases, and the company is investing to seize this opportunity.

Question 5: The impact of AI recommendation research and other AI tools in Google Shopping on shopping behavior and profitability. Additionally, the company's view on long-term capital intensity and how to view future capital intensity modeling and appropriate spending levels.

Utilizing AI advancements has made Google Shopping search more convenient, with an AI-rebuilt Google Shopping experience launching in the fourth quarter. In December, the number of daily active users in the U.S. Google Shopping increased by 13% year-on-year. The new experience can intelligently display relevant products, provide AI-generated briefs, price comparison tools, and personalized discount pages, presenting an interesting opportunity.

Regarding CAPEX planning: The company is responsible for capital expenditure management, with strict internal governance processes to allocate capacity based on customer needs and business conditions. The company has a wide range of businesses and can reuse capacity to ensure cost-effective investments and optimize data centers. The company relies on its own design and construction of data centers, customizing TPU performance that is excellent and capital expenditure efficient, considering these factors comprehensively in decision-making.

Question 6: With the development of AI agents, where do you think consumer AI agents will head in the coming years, and what does it mean in comparison to Google Search? Can both prosper together?

The launch of Gemini 2.0 helps achieve more agent use cases, and internal progress has been observed, which will bring more agent experiences to users. This expands the opportunity space; it is not a zero-sum game, and there are many new use cases that can thrive. Google Search can also leverage this to address more user use cases, and there is great anticipation for the future.

Question 7: In terms of generation costs per million tokens, is Google more efficient compared to cloud service peers, and is this an advantage as the business shifts to inference? Additionally, the strong performance of the financial services category will become an issue in 2025. Can this impact be quantified, and is it related to the performance of outbound advertisers in the Asia-Pacific region?

Google's DPU project is an inference chip, and the full-stack approach has differentiated advantages in cost, latency, and performance. This advantage is reflected in pricing, driving developer growth, with the number of developers increasing to 4.4 million in about six months, and Vertex usage increasing 20 times compared to last year. The company will continue to maintain this practice.

The strong performance of the financial services category is mainly related to structural changes in the insurance sector, representing a one-time growth. Specific impact figures for 2025 will not be provided, but the company is satisfied with the performance across various business categories, including retail, while emphasizing the foreign exchange impact and the situation of having one less day of revenue in the first quarter of 2025Question 8: The search usage for AI Overview is higher; how do you view the overall search usage, and has the integration of more AI accelerated the growth of search usage? Regarding YouTube, what impact does the shift from professional content to user-generated content have on usage and profit margins?

Overall search usage metrics are healthy, showing a growth trend on an annual basis, with AI Overview growing even stronger, especially among younger user groups. As search becomes more convenient for user interaction and supports follow-up questions, it is expected to drive further growth.

YouTube advertising saw healthy growth in the fourth quarter, driven by brand advertising and direct response advertising. The U.S. election ads boosted brand revenue, with strong contributions from the finance, retail, and technology sectors. YouTube holds a strong position with creators, with over 3 million channels participating in the YouTube Partner Program, and is confident about future development.

Question 9: Media reports indicate that Google aims to increase Gemini usage by the end of 2025. What methods will be used to achieve this—independent marketing or integration into existing experiences? How do you view Gemini's future profit opportunities, and will there be an increase in advertising components?

Gemini is showing strong momentum in applications in the second half of 2024, with positive feedback from the app launched on iOS, and the recent launch of the 2.0 series models has also driven usage growth. Innovations such as Gemini Live and Gemini Deep Research are well-received. There are also initiatives like the partnership with Samsung this year.

Currently, profitability focuses on the free tier and subscriptions, with future considerations prioritizing user experience and potential native advertising; advertising has always been a strategic focus, but this year is primarily concentrated on the subscription direction.

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