Google: Economy is high in the second half of the year with "uncertainties", focus investment on areas with better long-term prospects (telephone conference minutes)

The following are the core contents of the Google second-quarter performance conference call summary, and the financial report interpretation can refer to " Google: Hard Cash Out with Thunderstorm Expectations "

Management Report

1. Revenue: Last year's revenue performance was strong, the high base will continue to weaken the year-on-year growth rate of advertising revenue in the second half of the year.

2. Foreign exchange impact: The impact of 3.7 percentage points in the second quarter, based on the strength of the US dollar so far, we expect the resistance to exchange rates to be greater.

3. Recruitment: Given the uncertain global economic outlook and the recruitment progress achieved so far, we plan to slow down recruitment. However, although we expect the pace of employee growth to slow down next year, we will continue to recruit key positions, especially top engineering and technical talents.

4. Capital expenditures: We expect capital expenditures to continue to increase year-on-year in 2022. In the remaining time of 2022, this growth will be reflected in global technology infrastructure investments, of which servers are the largest component.

1. Continue to invest in artificial intelligence, search, and cloud fields, and invest in a way that adapts to the current environment.

2. Launched a new machine learning model that can identify more than twice as many potential malicious websites and phishing attacks as the previous model, which helps build a more secure network.

3. Established a partnership with Shopify. It will help creators easily connect their stores to YouTube, allowing consumers to shop in their live streams and videos.

Analyst Q&A

Q: How will economic challenges change the company's investment priorities?

A: I think now is a good time for us to focus our energy. Personally, I think this is an opportunity to ensure that our company is engaged in the right things with a long-term perspective, to ensure that we continue to invest in deep technology and computer science, and to do differentiated work.

It gives us the opportunity to evaluate everything we're doing critically and reallocate resources to our most critical priorities. This is a constrained optimization problem that makes investment more concentrated and rigorous. But we are mainly concerned with long-term development areas such as artificial intelligence, cloud computing, and other key areas.

Q: What is the judging trend of growth in the second quarter? From July's situation, what about the third quarter?

A: "Uncertainty" is the word we think best describes it. Our performance has already reflected and continues to reflect the significant growth last year. Overall, there is uncertainty in the development of the global economic environment, but the problems in different industries are also different, some are supply chain issues, and some are inventory issues.

Q: In the past few weeks, there have been some changes in the investment tone for this year, with news of recruitment slowdown throughout July, and now there are rumors of a hiring freeze. You mentioned that you are looking for an opportunity to optimize expenditure. Did you see a slowdown in business growth, especially in advertising or the cloud, or was it based on macroeconomic forecasts? Q: Can you summarize the reasons for the current business environment? What are your investment principles and directions, considering your strong financial situation?

A: Everyone is reacting to a series of dynamic changes, and it's hard to summarize the reasons because different industries and regions face different potential influencing factors. However, there are some commonalities in the macro-environment.

So, there are definitely some things that we want to be more cautious about. Regarding the basic areas, I will focus my energy and resources on things that are favorable for long-term development. I believe that when a company is in growth mode, it's hard to always spend time making all the adjustments that need to be done, and now this moment gives us an opportunity. Therefore, some of our priorities are to fully utilize and leverage our strengths during this period.

Q: Considering your strong financial situation, what are your investment principles and directions?

A: In our new fields, the focus is on establishing sustainable value, which is a long-term principle. It's clear that we've been doing certain things for a long time, such as search. But there are also newer fields, and when we make long-term investments, we consider business models, value creation, and profitability. Regardless of how financially healthy we are, the focus is on building sustainable value, being very cautious. So I think this time gives us an opportunity to put more attention and more time on Lens.

Q: Can we expect YouTube to perform well in the next 12 to 18 months, as it did last year? How should we understand how direct responsive advertising will bring better growth for YouTube in the future?

How will YouTube position itself in the future, with long videos? Short videos? Or is it just a platform for creators to monetize? How will products adjust to respond to the current competitive landscape?

A: First of all, we did see some advertisers reduce their marketing spending compared to last quarter, which is actually the biggest factor in the quarter-over-quarter decline in YouTube revenue growth. Like I said, some advertisers reduced spending due to supply chain issues, some due to inventory issues, and there are also other related factors.

(1) The war has had some slight headwinds on the year-over-year growth rate (last quarter, Google said that the revenue from its business in Russia was only about 1%).

(2) The impact of AT&T is still relatively stable, an issue we had already discussed in the previous quarters. This remains a factor that is not favorable, and we're still working to improve. However, we need to continue investing in YouTube to provide a better user experience and growth opportunities for our entire ecosystem, whether they are users or creators.

(3) Therefore, despite some advertisers pulling back, we do believe that YouTube will still benefit from the trend towards digital video – perhaps initially with brand advertising. Last quarter, we talked about YouTube's opportunity in CTV, and we are now very excited about its development path. We will continue to provide more special and innovative marketing tools for advertisers and more precise advertising effect measurement tools. (4) Regarding direct responsive advertising, we still believe there are many ways to address commercial intent on YouTube, including video campaigns, app campaigns, product pushes, and new online commerce features. We are testing many different things in online commerce. Therefore, we are excited about the growth opportunities here.

We also see that YouTube's ad customers are distributed at both ends of the marketing funnel model, pursuing ads that directly convert and ads that sow brand seeds. This is what I mentioned before - giving ad customers the ability to obtain direct or relevant user feedback is where YouTube really excels. Therefore, in the long run, direct response ads and innovation opportunities on YouTube are still very encouraging.

(5) I can also briefly introduce Shorts, which is where consumer consumption of short videos has increased significantly. We can see this trend on multiple platforms, including YouTube. A while ago, we announced that Shorts now has over 1.5 billion logged-in users watching it every month. Overall, we continue to see good user stickiness on YouTube.

(6) Last quarter, we shared that YouTube has seen significant growth in watch time in the past two years, even as people have returned to face-to-face offline activities. Global users continue to spend more time on YouTube. As I mentioned before, Shorts' early profitability results are also encouraging, and we are excited about the opportunities here.

Q: Can you reveal the composition of the advertising base?

Q: We have a very, very broad customer base, if you prefer the overall target market here. Let me reiterate what I said before. We are not just solving online marketing budgets, taking away budgets from traditional or TV advertising, we also see many opportunities for growth in offline marketing budgets, whether it is promotional pricing, product placement, sponsorship, and so on. But ultimately, our main goal is to provide a good experience for our users, improve the return on investment for advertisers, and make them successful in all the areas I just talked about.

Q: Cloud business growth has slowed down, and I want to know if you see an increase in new customers. If you see sales decline, is it urgent to improve profitability to achieve balance of payments? Or is it still an investment-driven phase?

A: In terms of cloud business, we continue to see strong momentum and huge market opportunities. We often communicate with customers of all sizes who have just entered the cloud computing space, showing many future growth opportunities.

In the short term, some customers' spending capacity has been affected, and some customers' spending cycle has been prolonged, but I do not think this is a long-term trend. This is a reaction that each customer has made in response to the highly uncertain macro environment.

As for profitability considerations, we have always believed that cloud services are a very good long-term investment opportunity, and many corporate customers are still in the early stages of migrating to the cloud. In terms of balancing revenue growth and direct profit-making capabilities, our focus is on ensuring that our investments support long-term growth and considering the growth space it can bring us. So keep an eye on it, and focus on the path to profitability and free cash flow to drive attractive returns. I firmly believe in long-term growth and see this as the right investment level for the entire business.

Q: Considering the announcement of a buyback plan increased to $70 billion in the first quarter, this is your largest buyback ever, while other tech companies have been avoiding it during the same period. Could you talk about your capital allocation strategy and your thoughts on buybacks?

A: The core of our capital allocation strategy is what we have been talking about throughout this call, investing in long-term growth and optimizing cash flow. Therefore, we have the opportunity to continue to invest and return investment returns to shareholders. We are pleased to increase the authorization to $70 billion and continue to believe that it is another valuable tool in all the investments we make.

Q: You talked about the profitability path of YouTube shorts, what have you seen so far?

A: We are encouraged by the results we have seen in terms of profitability for shorts, but we do not have more details to share at this time.

Q: How do you evaluate the recent actions of advertisers cutting advertising spending?

A: Some advertisers reduced spending on YouTube and affiliate ads in the second quarter, reflecting uncertainty due to some factors. For every advertiser, they are actually challenged to dismantle the uncertainty of the current environment-there are differences between different companies and industries. As you have seen from the news, some companies will be affected by multiple factors.

Q: You just mentioned that artificial intelligence and cloud computing are the key areas of our long-term focus. Considering the current focus, are there any areas worth paying attention to, but now at a lower priority? Secondly, you gave us some great data last year on conversational and visual search queries and strong growth, how will this affect profitability?

A: What we are doing from pure research to applied research to AI work actually happened very close to areas such as search and YouTube. At this moment, it is an opportunity for us to improve our focus.

When I think of the opportunities brought by artificial intelligence, we can see that we have made a lot of progress this year from the I/O conference, including multiple search aspects.

The trend now is that people are doing a lot of voice search and a lot of visual search, both of which are good examples of how we create value in core products. Similarly, if you look at the Google Marketing Live ads, you'll see that the team talked a lot about AI-driven products and features, which really bring value to advertisers in the most private way.

In terms of cloud computing, I would say that today, many AI opportunities are more data analytics-based, and it is in this part where we see the greatest strength. But over time, I think there will be more opportunities.

Most importantly, we continue to see tremendous breakthroughs from our research team, whether it's LaMDA 2 (conversational AI system), PaLM (NLP model trained on a super large scale), Minerva (able to answer questions about calculus, organic chemistry, and general relativity, among others). It's still some progress we've made recently. So, we'll continue to focus on translating our research into real products and applications, with a long-term vision.

Q: Some top retailers like Walmart are seeking to cut costs. Does this mean they may cut marketing spend on YouTube? So, I'm curious, can you explain from a product perspective how you maintain the growth of retail ads in the search field?

A: As I mentioned in my opening remarks, retail ads continued to be an important source of search advertising in the second quarter. The search results in several categories that I mentioned are all attractive, such as clothing and women's clothing, as I mentioned earlier.

I think it's also worth clarifying when we talk about retail growth. We're talking about our overall retail strategy, which pervades all of our advertising products and surfaces, and shopping strategies are just an important part of it.

From a trend perspective, as retailers continue to build their digital influence to drive online and offline sales, Omni-channel is still a way to go, and we're helping them do that. In the past few quarters, I think I've talked about a lot of ways we're doing this.

In the second quarter, we found that the use of local inventory ads is continuing to rise year on year. Based on location-based mobile platforms, it's helpful for advertisers to better present their products, manage inventory, and provide services such as curbside pickup.

In addition, we're migrating from Smart Shopping campaigns to Performance Max, and we've mentioned this, advertisers are pleased with the expanded user reach and improved performance.

We've been focusing on developing tools and features to help offline and online businesses directly connect with these customers through our platform, and we're excited about the next steps in our retail offerings, especially in search and YouTube. We'll continue to focus on building useful and outstanding products and experiences for users and these businesses.

Risk disclosure and statement for this article: Dolphin Analyst Disclaimer and General Disclosure