GOOGL FY24--Where there is a will there is a way?

 GOOGLE FY24

Good result with positive revenue growth, op margin slightly lower (Q4 32.2%, Q324 32.5%, yoy well up), as maybe the weight of capex begins to be felt. Revenue and ebit per ee were better. GM higher yoy 58.2 v 56.6, NPAT margin higher yoy 28.6% v 24%, ROE yoy higher 30.8% vrs 26%. These are strong numbers.

Search, cloud and YT continue to do well albeit with some variability. Networks continue to struggle, no surprise here.

The big issue for GOOGL and one that cannot easily be solved is the return profile of the large capex program. GOOG again came out with a large capex number, this time $75B for 2025 ($53B 2024). The returns disclosed to date have been adequate, however, some of these are undoing the previous excess and one-offs. There is a less clear path to monetisation versus its peers. Whereas MSFT has its large enterprise base that already pays fees, AMZN has various opportunities in its vast physical assets, Meta surprisingly appears to be making strong progress on its advertising optimisation, but GOOG is a bit different. Search needs to improve, as it is doing, but only to maintain its position, also incremental gains can be made to internal efficiency for Google, but the ability to charge its customer base for expensive advancement in AI is not as obvious. Possible but a bit more complex. Faith in management in these times is usually tested and GOOGl management proffered several warnings on the next year's earnings (comps and D&A). However, the proof will be ROIC on the capital and that will take a bit of time. A successful universal agent would change everything, but there is competition. Management is very active and has many levers to pull, as can be seen many times in the commentary below, which is good.

Valuation

GOOG base case is 10% 5yr eps growth with a 22X exit multiple. To generate a 10% return cagr an entry price of $180 is required. The PE exit is low given the risk to search and the lack of clarity in the outcome. The 10% eps growth is also low but we have the challenge of the large capex depreciation to come. There is some dynamism in these numbers, potentially, to the upside and downside. Overall it’s a strong “hold” at current levels and is a large/mid-sized position.

 

Call Summary

 Sundar Pichai CEO

…leadership in AI and our unique full stack. We're making dramatic progress across compute and model capabilities, and in driving efficiencies.

The company is in a great rhythm and cadence, building, testing, and launching products faster than ever before. …. In Search, AI overviews are now available in more than 100 countries. They continue to drive higher satisfaction in Search usage. Meanwhile, circle to Search is now available on over 200 million Android devices.

AI

three areas of our differentiated full-stack approach to AI innovation. Our leading AI infrastructure, our world-class research, including models and tooling, and our products and platforms that bring these innovations to people at scale.

AI Infrastructure. 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 drive efficiencies at every level, from training and serving to developer productivity.

World class research including models. In December, we unveiled Gemini 2.0, our most capable AI model yet, built for the agentic era. We launched an experimental version of Gemini 2.0 flash, our workhorse model with low latency and enhanced performance. Late last year, we also debuted our experimental Gemini 2.0 Flash Thinking Model. The progress-to-scale thinking has been super fast, and the reviews so far have been extremely positive. We are working on even better thinking models and look forward to sharing those with the developer community soon. Gemini 2.0 advances in multi-modality and tool use enable us to build new agents that bring us closer to our vision of a universal assistant.

We're also excited by the progress of our video and image generation models. Veo 2, our state-of-the-art video generation model, and Imagen 3, our highest-quality text-to-image model. These generative media models, as well as Gemini, consistently top industry leaderboards and score top marks across industry benchmarks. That's why more than 4.4 million developers are using our Gemini models today, double the number from just 6 months ago.

Products and Platforms put AI into the hands of billions of people around the world. We have seven Products and Platforms with over 2 billion users and all are using Gemini. That includes Search, where Gemini is powering our AI overviews. People use Search more with AI overviews and usage growth increases over time as people learn that they can ask new types of questions. This behaviour is even more pronounced with younger users who really appreciate the speed and efficiency of this new format. We also are pleased to see how Circle to Search is driving additional Search use and opening up even more types of questions. This feature is also popular among younger users.

We continue to see strong growth across our broad portfolio of AI-powered Cloud solutions. It begins with our AI Hypercomputer, which delivers leading performance and cost, across both GPUs and TPUs.

In Q4, we saw strong uptake of Trillium, our sixth-generation TPU, which delivers 4x better training performance and 3x greater inference throughput compared to the previous generation. Our AI developer platform, Vertex AI, saw a 5x increase in customers year-over-year. Vertex usage increased 20x during 2024, with particularly strong developer adoption of Gemini Flash, Gemini 2.0, Imagen 3, and most recently, Veo.

Our growing portfolio of AI applications is also seeing strong customer adoption. In Q4, we introduced Google Agentspace, which helps enterprises synthesize data with Google-quality Search, create Gemini-powered agents, and automate transactions for employees. In addition, we recently gave all Google Workspace Business and Enterprise customers access to all of our powerful Gemini AI capabilities to help boost their productivity.

Platforms and Devices. Google One's (storage) performance has been outstanding and is one of our fastest-growing subscription products in terms of subscribers and revenue growth. We also recently announced Android XR, the first Android platform built for the Gemini era. Created with Samsung and Qualcomm, Android XR is designed to power an ecosystem of next-generation extended reality devices, like headsets and glasses.

Philipp Schindler COO

Google Services revenues were $84 billion for the quarter, up 10%, driven primarily by 11% year-on-year growth in advertising revenues. Strong growth in Search and YouTube advertising was partially offset by year-over-year decline in network revenues.

We've already started testing Gemini 2.0 in AI overviews and plan to roll it out more broadly later in the year. In Search, we're seeing people increasingly ask entirely new questions using their voice, camera, or in ways that were not possible before, like with Circle to Search. Lens is used for over 20 billion visual search queries every month, and the majority of these searches are incremental.

People shop more than a billion times a day across Google. Last quarter, we introduced a reinvented Google shopping experience, rebuilt from the ground up with AI.

we believe that AI will revolutionize every part of the marketing value chain, and over the past quarter, we've seen how our customers are increasingly focusing on optimizing their use of AI. DemandGen campaigns across targeting, creative generation, and bidding…On media buying, we made YouTube select creator takeovers generally available in the U.S. and will be expanding to more markets this year. Creators know their audience the best and creator takeovers help businesses connect with consumers through authentic and relevant content.

we made Meridian, our marketing mix model, generally available for customers, helping more businesses reinvest into creative and media buying strategies that they know work. Based on a Nielsen meta-analysis of marketing mix models, on average, Google AI-powered video campaigns on YouTube deliver 17% higher return on advertising spend than manual campaigns.

Expanding on our state-of-the-art video generation model, we announced Veo 2, which creates incredibly high-quality video in a wide range of subjects and styles. It's been inspiring to see how people are experimenting with it. We'll make it available to creators on YouTube in the coming months.

Shorts continue its ascent and is closing the gap with long form. In 2024, the monetization rate of Shorts relative to in-stream viewing increased by more than 30 percentage points in the U.S., and we expect to make additional progress in 2025. We're making it easier for advertisers to benefit from Shorts on all screens. We're particularly excited by its success on connected TV, which now makes up 15% of shorts viewing in the U.S.

YouTube makes multi-year investments to tap into shifting consumer behaviour. The current surge in living room viewership directly reflects years of work to build the right products and partnerships. Creators are now prioritizing high-quality viewing experiences that truly shine on TV screens, inspiring even more viewers to tune in. In fact, the number of creators making the majority of revenue from TV is up over 30% year-on-year

Anat Ashkenazi CFO

Alphabet revenue for 2024 reached $350 billion, up 14% on a reported basis and 15% in constant currency versus 2023.

Total cost of revenue was $40.6 billion, up 8%. TAC was $14.8 billion, up 6%. We continue to see a revenue mix shift with Google Search growing at double-digit levels, while network revenues, which have a much higher TAC rate, declined. Other cost of revenue was $25.8 billion, up 9%, with the increase primarily driven by content acquisition costs, primarily for YouTube, followed by depreciation, due to increasing investments in our technical infrastructure.

In terms of total expenses, the year-over-year comparisons reflect $1.2 billion in exit charges that we took in the fourth quarter of 2023 in connection with actions to optimize our global office space.

Operating income increased 31%, this quarter to $31 billion, and operating margin increased to 32%, representing 4.6 points of margin expansion. Net income increased 28% to $26.5 billion, and earnings per share increased 31% to $2.15. We delivered free cash flow of $24.8 billion in the fourth quarter and $72.8 billion for the full year 2024. We ended the quarter with $96 billion in cash and marketable securities.

Google Service revenues increased 10% to $84.1 billion, reflecting the strong momentum across Google Search and YouTube ads. Google Search and other advertising revenues increased by 13% to $54 billion. The robust performance of Search was once again broad-based across verticals, led by the financial service vertical due to strength in insurance, followed by retail.

YouTube advertising revenue increased 14% to $10.5 billion, driven by brand, followed by direct response advertising.

We continue to have significant growth in our subscription products, primarily due to increase in the number of paid subscribers across YouTube TV, YouTube Music Premium, and Google One.

With regards to Platform, we saw a slight increase in the growth rate in Play, primarily due to a strong increase in the number of buyers. Google's service operating income increased 23% to $32.8 billion, and operating margin increased from 35% to 39%, representing a meaningful margin expansion.

Google Cloud segment, which continued to deliver very strong results this quarter. Revenue increased by 30% to $12 billion in the fourth quarter, reflecting growth in GCP across core GCP products, AI infrastructure, and generative AI solutions. Once again, GCP grew at a rate that was much higher than cloud overall (more than Workspace). Healthy Google Workspace growth was primarily driven by increase in average revenue per seat.

Google Cloud operating income increased to $2.1 billion, and operating margin increased from 9.4% to 17.5%. We're pleased with the work the cloud team is doing to deliver valuable solutions to the customer and generate revenue growth, as well as its continued focus on driving efficiencies across the cloud business.

With respect to CapEx, our reported CapEx in the fourth quarter was $14 billion, primarily reflecting investments in our technical infrastructure, with the largest component being investment in servers, followed by data centers, to support the growth of our business across Google Services, Google Cloud, and Google DeepMind.

As for our segments, Google Services, advertising revenue in 2025 will be impacted by lapping the strength we experience in the financial service vertical throughout 2024. And in Cloud, given the revenues are correlated with the timing of deployment of new capacity, we could see variability in cloud revenue growth rates depending on when new capacity comes online during 2025.

We expect to invest approximately $75 billion in CapEx in 2025 with approximately $16 billion to $18 billion of that in the first quarter.

In terms of expenses, first, the increase in our investment in CapEx over the past few years will increase pressure on the P&L, primarily in the form of higher depreciation. In 2024, we saw 28% year-over-year growth in depreciation as we put more technical infrastructure assets into service. Given the increase in CapEx investments over the past few years, we expect the growth rate and depreciation to accelerate in 2025.

Second, we expect some headcount growth in 2025 in key investment areas such as AI and cloud.

For the full year 2024, revenue grew by 14% or by $43 billion, reaching $350 billion. Google Services and Google Cloud each continue to see double-digit revenue growth coupled with margin extension.

Question-and-Answer Session

Future of Search

On Search, obviously, we view, I mean, this has been a long continual journey. AI overviews has been the next step. It's playing out positively, as we have indicated, the metrics look great, and we are obviously trading on that experience, bringing better and better models, expanding to the number of queries where it works and so on. But there's a lot more to come. I think we'll continue bringing AI in more powerful ways, in multi-modal ways. Things like what we've done with Lens Circle to Search, you can imagine the future with Project Astra. You can also imagine areas like we have done in Gemini Deep Research, possibilities where you are really dramatically expanding the types of use cases for which Search can work, things which don't always get answered instantaneously but can take some time to answer. Those are all areas of explorations and you will see us, putting newer experiences in front of users through the course of 2025. And so I do feel the opportunity space with AI, there's a lot of unlock ahead.

I certainly see opportunities for further productivity and efficiency, and this is one of our priority areas. And we're going to do that so that we can make sure we continue to invest in areas such as AI and cloud where we see potential for continued growth. Efficiency targets in Capex spend, headcount growth, real estate footprint, simplification.

Efficiency

I'll remain focused on areas that I've mentioned before, which include the technical infrastructure, so the $75 billion in CapEx I mentioned for this year, the majority of that is going to go towards our technical infrastructure, which includes servers and data centres. So ensuring we do that in the most efficient way is critical….Using our own AI tools to how we run the business, whether it's writing code with AI, or even running some of our key processes using AI tools. So we're looking at all that. It's going to -- it's -- this is not a one-quarter type of effort. It's going to continue throughout the year, and we're going to continue to focus on that so that we can support the growth in other areas.

AI Overviews

AI overviews, which is really nice to see, continue to drive higher satisfaction and search usage. And as you know, we recently launched the ads within AI overviews on mobile in the U.S., which builds on our previous rollout of ads above and below. And as I talked about before, for the AI overviews overall, we actually see monetization at approximately the same rate, which I think really gives us a strong base on which we can innovate even more.

GCP

GCP grew at a much higher rate than overall cloud. Two items to think about from a deceleration perspective. The first is we are lapping a very strong quarter of AI deployment in Q4 of 2023.The second is the one you've alluded to. We do see and have been seeing very strong demand for AI products in the fourth quarter in 2024. We exited the year with more demand than we had available capacity. So we are in a tight supply demand situation, working very hard to bring more capacity online. As I mentioned, we've increased investment in CapEx in 2024, continue to increase in 2025, and will bring more capacity throughout the year.

Deepseek

Look, I think for us it's always been obvious, over time, there's frontier model development, but you can drive a lot of efficiency to serve these models really, really well. And if you look at one of the areas in which the Gemini model shine is the Pareto frontier of cost, performance, and latency and if you look at all three attributes, I think we lead this Pareto frontier. And I would say both are 2.0 flash models or 2.0 flash thinking models. They are some of the most efficient models out there, including comparing to DeepSeek's V3 and R1. And I think a lot of it is our strength of the full stack development into an optimization, our obsession with cost per query, all of that, I think, sets us up well for the workloads ahead, both to serve billions of users across our products and on the cloud side.

Couple of things I would say are, if you look at the trajectory over the past 3 years, the proportion of the spend towards inference compared to training has been increasing, which is good because obviously inference is to support businesses with good ROIC. And so I think that trend is good. I think the reasoning models, if anything, accelerates that trend because it's obviously scaling upon inference dimension as well.

And so I think, look, I think part of the reason we are so excited about the AI opportunity is we know we can drive extraordinary use cases because the cost of actually using it is going to keep coming down, which will make more use cases feasible. And that's the opportunity space. It's as big as it comes. And that's why you're seeing us invest to meet that moment.

AI shopping on search

And the new Google Shopping experience uses AI to really intelligently show the most relevant products, helping to speed up and simplify your research. You get an AI-generated brief with top things to consider for your search, plus maybe products that meet your needs. So shoppers very often want low prices. So the new page not only includes like deal finding tools like price comparison, price insights, price tracking throughout, but there's also a new and dedicated personalized deals page where you can browse deals for you, and all this is really built on the backbone of AI. So we think this is a very interesting opportunity.

Capex

we are managing very responsibly with a very rigorous even internal governance process looking at how do we allocate the capacity and what would we need to support the customer demand externally, but also across the Google, the Alphabet business. And as you've seen in the comment I've just made on cloud, we do have demand that exceeds our available capacity, so we'll be working hard to address that and make sure we bring more capacity online. We do have the benefit of having a very broad business, and we can repurpose capacity, whether it's through Google Services or Google Cloud to support, whether it's Search or DeepMind or Google Cloud Customers, we can do that in a more efficient manner.

We also look at every investment that we make to ensure that we're doing it in the most cost-efficient way to optimize our data centre. As you know, our strategy is mostly to rely on our own self-design and build data centres. So they're industry-leading in terms of both cost and power efficiency at scale. We have our own customized TPUs. They're customized for our own workload. So, they do deliver outstanding superior performance and CapEx efficiency. So, we're going to be looking at all that when we make decisions as to how we're going to progress capital investments throughout the coming years.

AI consumer agent competition

Gemini 2.0 was definitely built with the view of enabling more agentic use cases. I think we'll be able to do more agentic experiences for our users. Look, I actually think all of this expands the opportunity space. I think historically we've had information use cases, but now you can have, you can act on your information needs in a much deeper way. It's always been our vision when we have talked about Google Assistant, et cetera. So I think the opportunity space expands. I think there's plenty of, it feels very far from a zero-sum game. There's plenty of room, I think, for many new types of use cases to flourish. And I think for us, we have a clear sense of additional use cases we can start to tackle for our users in Google Search. And all the early work with AI overview shows that users will react positively to that.

GOOGL competitive advantage on inference costs

the whole TPU project started, V1 was effectively an inferencing chip, so we've always, part of the reason we have taken the end-to-end stack approach is that, so that we can definitely drive a strong differentiation in end-to-end optimizing, and not only on a cost, but on a latency basis and a performance basis. We have the Pareto frontier we mentioned, and I think our full-stack approach and our TPU efforts all play -- give a meaningful advantage, and we plan, you already see that. I know you asked about the cost, but it's effectively captured.

When we price outside, we pass on the differentiation. It's partly why we've been able to bring forward flash models at very attractive value props, which is what is driving both developer growth. We've doubled our developers to 4.4 million in just about 6 months. Vertex usage is up 20x last year. And so all of that is a direct result of that approach and so we will continue doing that.

Overall search usage

on Search usage overall, our metrics are healthy. We are continuing to see growth in Search on a year-on-year basis in terms of overall usage. Of course, within that, AI overviews has seen stronger growth, particularly across all segments of users, including in younger users. So it's being well received. But overall, I think through this AI moment, I think Search is continuing to perform well. And as I said earlier, we have a lot more innovations to come this year. I think the product will evolve even more. And I think as you make Search, as you give, as you make it more easy for people to interact and ask follow-up questions, et cetera, I think we have an opportunity to drive further growth.

You Tube growth

Watch time growth remains robust, particularly in key monetization opportunity areas, such as Shorts and Living Room. the User Generated Content (on specific products) side, we have a very strong position with creators and we've always said creators are at the centre of YouTube success here. They're the number one most important thing we care about and this strong position really gives us a lot of confidence here. Today we have more than 3 million channels that are actually in the YouTube Partner Program, which is really an incredible program. (UGC lower margin than Professional content?)

Gemini Monetisation

First of all, we've had strong momentum for Gemini on the app side, particularly through the second half of 2024. And some of it is we've made it more easily accessible. We've brought it to, for example, with a dedicated app on iOS, which has been super positively received and definitely getting a lot of traction there. So definitely driving organic growth by putting the product out. We just last week rolled out with our 2.0 series of models. So 2.0 Flash, I mean, I think that's one of the most capable models you can access at the free tier. So that's definitely contributing as well.  We've had a couple of key innovations there. Gemini Live, I think, has been definitely a hit with users, as well as for advanced users, Gemini Deep Research. So I think a combination of innovation, continually trading on the product and making it better, is driving a lot of usage. And we'll have a lot more to come as we go this year. And we obviously have a partnership with Samsung, so there are other things which will contribute to it as well.

On the monetization side, obviously for now we are focused on a free tier and subscriptions, but obviously as you've seen in Google over time, we always want to lead with user experience, We do have very good ideas for native ad concepts, but you will see us lead with the user experience. But I do think we're always committed to making the products work and reach billions of users at scale. And advertising has been a great aspect of that strategy. And so just like you've seen with YouTube, we'll give people options over time. But for this year, I think you will see us be focused on the subscription direction.