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Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG)
Q2 2018 Earnings Conference Call
July 23, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Alphabet Inc. second quarter 2018 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance, please press * then 0 on your touchtone telephone.

I would now like to turn the conference over to Ellen West, Head of Investor Relations. Please go ahead.

Ellen West -- Head of Investor Relations

Thank you. Good afternoon, everyone, and welcome to Alphabet's second quarter 2018 earnings conference call. With us today are Ruth Porat and Sundar Pichai.

Now, I'll quickly cover the safe harbor. Some of the statements that we make today may be considered forward-looking, including statements regarding our future investments, our long-term growth and innovation, the expected performance of our businesses, and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially.

For more information, please refer to the risk factors discussed in our Form 10-K for 2017 filed with the SEC. Undue reliance should not be placed on any forward-looking statements, and they are made based on assumptions as of today. We undertake no obligation to update them. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release.

As you know, we distribute our earnings release through our investor relations website located at abc.xyz/investor. This call is also being webcast from our IR website, where a replay of the call will be available later today. And now, I'll hand the call over to Ruth.

Ruth Porat -- Chief Financial Officer

Thank you, Ellen. We delivered another quarter with strong operating performance, reflecting our focus on building great experiences for users, advertisers, and enterprise customers around the world. In aggregate, we had substantial revenue growth, up 26% year-on-year and up 23% in constant currency.

Sites revenues continue to exhibit strong year-on-year momentum, benefiting from innovation and secular growth with Mobile Search again leading the way. Our network advertising business maintained healthy growth led by AdMob and Programmatic advertising. The business comprising other revenues, namely Cloud, Play, and Hardware again had substantial growth.

Our outline for today's call is I'll begin with results for the quarter on a consolidated basis for Alphabet focusing on year-over-year changes. There are two items to note in our earnings press release. First, we provided a table to highlight the impact of the European Commission fines on operating income, net income, and EPS results in the second quarters of 2018 and 2017.

Second, as discussed last quarter, our results are affected by the new accounting standard that changes the way companies account for equities security investments. This new standard continues to result in greater volatility in OI&E. I'll highlight the impact on particular line items as I review the quarter. I will then review results for Google, followed by Others Bets, and we'll conclude with our outlook. Sundar will then discuss business and product highlights, after which we will take your questions.

Starting with a summary of Alphabet's consolidated financial performance for the quarter. Our total revenues of $32.7 billion were up 26% year-over-year. We realized a positive constant currency impact on our revenues year-over-year of $768 million, or $665 million after the impact of our hedging program.

Turning to Alphabet revenues by geography, you can see that our performance was strong again in all regions. U.S. revenues were $14.9 billion, up 21% year-over-year. EMEA revenues were $10.8 billion, up 26% year-over-year. In constant currency terms, EMEA grew 19%, reflecting strengthening of both the Euro and the British pound. APAC revenues were $5.1 billion, up 36% versus last year and up 34% in constant currency, reflecting strengthening of the Japanese yen and Korean won. Other Americas revenues were $1.8 billion, up 31% year-over-year and up 34% in constant currency, reflecting strengthening of the dollar relative to the Brazilian real.

On a consolidated basis, total cost of revenues, including TAC, which I'll discuss in the Google segment results, was $13.9 billion, up 34% year-on-year. Other cost of revenues on a consolidated basis was $7.5 billion, up 41% year-over-year, primarily driven by Google-related expenses. The key drivers were costs associated with our data centers and other operations, including depreciation, which continued to be affected by a reallocation of certain operating expenses and content acquisition costs, primarily for YouTube, followed by hardware-related costs.

Operating expenses, including the impact of the EC fine, were $16 billion. Excluding the impact of the EC fines, operating expenses were $10.9 billion in the quarter, up 24% year-over-year. Once again, the biggest increase was in R&D expenses, reflecting our continued investment in technical talent. The growth in sales and marketing expenses reflects increases in sales and marketing headcount, primarily for Cloud, followed by advertising investments in Cloud and the Assistant.

G&A expense trends in the second quarter were affected by a number of factors, in particular performance fees accrued in connection with the recognition of equity security gains, which were again partially offset by the reallocation of certain expenses from G&A, primarily to other cost-to-revenues.

Stock-based compensation totaled $2.4 billion. Headcount at the end of the quarter was 89,058, up 4,008 from last quarter. As with prior quarters, the majority of new hires were engineers and project managers. In terms of product areas, sizable headcount increases were in Cloud, for both technical and sales roles.

Operating income was $2.8 billion. Excluding the impact of the EC fines, operating income was $7.9 billion, up 15% versus last year, for an operating margin of 24%. Other income and expense was $1.4 billion, which includes $1.1 billion of gains in equity security investments. We provide more detail on the line items within OI&E in our earnings press release.

Our effective tax was 24.2% for the second quarter, reflecting a sizable impact from the non-deductibility of the EC fine. Net income was $3.2 billion and earnings per diluted share were $4.54. Excluding the impact of the EC fine, net income was $8.3 billion and earnings per diluted share were $11.75.

Turning now to capex and operating cash flow. Cash capex for the quarter was $5.5 billion, which I'll discuss in the Google segment results. Operating cash flow was $10.1 billion with free cash flow of $4.7 billion. We ended the quarter with cash and marketable securities of approximately $102 billion.

Let me know turn to our segment financial results starting with the Google segment. Revenues were $32.5 billion, up 25% year-over-year. In terms of the evaporation detail, Google Sites revenues were $23.3 billion in the quarter, up 26% year-over-year. In terms of dollar growth, results were led again by Mobile Search, with strong contributions from both YouTube and Desktop Search.

Network revenues were $4.8 billion, up 14% year-on-year, reflecting the ongoing momentum of AdMob and Programmatic. Other revenues for Google were $4.4 billion, up 37% year-over-year, fueled by Cloud, Play, and Hardware. We continue to provide monetization metrics in our earnings press release to give you a sense of the price and volume dynamics of our advertising businesses.

Total traffic acquisition costs were $6.4 billion, or 23% of total advertising revenues, and up 26% year-over-year. Total TAC as a percentage of total advertising revenues was up year-over-year, primarily reflecting an increase in the Sites TAC rate, which was offset by a favorable revenue mix shift from Network to Sites. The increase in the Sites TAC rate year-over-year was driven by changes in partner agreements and the ongoing shift to Mobile, which carries higher TAC. This quarter, we experienced a year-on-year decline in the Network TAC rate as the result of a favorable mix shift within our Programmatic business.

Google's stock-based compensation totaled $2.3 billion for the quarter, up 21% year-over-year. Operating income was $9 billion, up 17% versus last year, and the operating margin was 27.6%. Accrued capex for the quarter was $5.3 billion, reflecting investments in production equipment, data center construction, and facilities.

Let me now turn and talk about Other Bets. Other Bets revenues were $145 million, primarily generated by Fiver and Verily. Operating loss was $732 million for the second quarter. Other Bets accrued capex was $10 million. We're pleased with our progress across Other Bets. A couple of update. Waymo expanded it's partnership with Fiat Chrysler with the option to add up to 62,000 Chrysler Pacifica Minivans to its self-driving fleet. Last week, Waymo announced that it has driven more than 8 million fully autonomous miles, with most of those on city streets.

A couple of weeks ago, X announced that Loon and Wing have graduated to become independent companies under Alphabet. Graduation from X signals that these companies have reached certain technical and business milestones and that their focus is shifting toward commercialization. Just last week, Loon indicated that it is partnering with Telkom Kenya to launch commercial service in regions of Kenya by early 2019.

Let me close with some observations on the quarter and our longer term outlook. First, with respect to revenues, we're pleased with the ongoing momentum in our advertising businesses. As discussed previously, we continue to identify new opportunities through innovation, including the benefits of applying machine learning to create more useful experiences for users and advertisers.

Looking ahead, our Hardware business is seasonal. Typically experiencing lower growth in the third quarter in anticipation of the launch of new products for the holiday season. Second, with respect to profitability, within cost of revenues, the biggest component is TAC. As we've discussed for the past couple of quarters, we expect that the pace of year-over-year growth in Sites TAC as a percentage of Sites revenue would slow after the first quarter of 2018, and you can see that clearly in our results this quarter.

As frequently discussed, we do expect the Sites TAC rate to continue to increase year-on-year, reflecting ongoing strength in Mobile Search, albeit it at a more moderate pace relative to the year-on-year increases experienced over the past several quarters.

Within opex, we continue to take a disciplined approach to setting priorities as we invest for long-term growth. The majority of our headcount growth continues to be in technical roles and engineering and product management. In terms of business areas, the largest number of headcount additions were in our Cloud business, with hires for engineering, sales, and marketing.

As a reminder, headcount additions tend to be seasonally higher in Q3 because that is when we bring on new graduates. As I mentioned last quarter regard sales and marketing, we continue to expect expenses to be more heavily weighted toward the back half of the year to support the holiday season.

Another factor to consider in year-on-year comparisons next quarter is the timing of two expense items in Q3 last year. As we called out last year, there was a meaningful benefit in the third quarter of 2017 from the shift in timing of our annual equity refresh, and also from the timing of sales and marketing spend, which was more heavily weighted to the fourth quarter.

For our Other Bets, we remain focused on making progress on a number of commercial opportunities across the businesses, while continuing to manage investment against achievement of key milestones.

Third, with respect to capex, as I discussed with you last quarter, our commitment to growth is evident in the ongoing trend in capex investment. We've been investing meaningfully in Search and Ads consistent with the opportunities we see to benefit the user and advertiser experience and we are investing in the additional compute power required to support growth in the number of YouTube users globally.

We're also investing in new businesses that are growing at a rapid pace and have sizable compute needs, most notably Cloud. The investment pace also reflects the importance of machine learning across all of our products, including Search and Ads. Although machine learning is more compute intensive, it is increasingly core to businesses across Alphabet and opens up the possibility of accelerated innovation in products and services. In keeping with our approach across Alphabet to invest thoughtfully for long-term value creation, we remain focused on both performance and cost effectiveness.

I will now turn the call over to Sundar.

Sundar Pichai -- Chief Executive Officer

Thanks, Ruth. It's been a busy few months at Google. We showed a lot of what we are working on at events like Google Marketing Live, Brandcast, and of course, our annual developer conference, Google I/O. It was exciting to have millions of people join us in person and via livestream. Tomorrow, I hope you'll tune into Google Cloud Next, where the great momentum and innovation in our Cloud business will be fully on display.

The common thread you'll hear on today's call is the benefit of machine learning and AI and how it's improving our products and generating great results for our users and partners. I also hope that everyone enjoyed the workup as much as I did. I know our French Googlers were very excited. I love the competition and was extremely proud to see positive feedback about how useful Google Translate was for people who traveled to Russia.

The app translates about 143 billion words a day and during the workup, we saw a huge bump in volume. In these simple moments, when you're in an unfamiliar place or you don't know the language, Google is there to help with the right information at the right time. This is what we aspire to be best at and it's why billions of people continue to put their trust in our products.

Today, let's start with how AI is enabling us to advance our mission of making information accessible and useful to everyone in new ways. Then I'll share updates on our computing, video, and advertising platforms, which are helping our partners succeed and grow. Finally, I'll talk about our growing Cloud business.

Let's begin with AI helping our mission. We revamped the Google News app in May to great reviews. It uses machine learning to highlight top stories organized for users, explore topics more deeply, with articles from a range of trusted news sources. We believe in the need to deliver high-quality information and news to users and to support the news industry as we do so.

The Google Assistant is another great product based on machine learning. By the end of this year, it'll be available in more than 30 languages and 80 countries. We have worked with partners to expand the number of smart devices that are now compatible with the Google Assistant, like doorbells, dryers, refrigerators, and more, and connect with more than 5,000 devices in the home.

At Google I/O, we also highlighted how AI is improving Google Maps, including enhancing the experience with Assistant and AR features. Through our improvements in machine learning, we have seen a 25X increase in our ability to build Maps algorithmically and we have added 110 million algorithmically drawn buildings to Maps since the beginning of this year. With over a billion users, we are continuing to see tremendous growth in Maps, with especially strong growth in countries like Indonesia, India, and Nigeria, each of which are growing over 50% year-on-year.

There are many more great AI-powered features we rolled out this quarter, including the new version of Gmail with Smart Compose, a new feature that helps users draft emails faster, and Google Photos now suggests actions to help you brighten, share, or archive a picture.

Next, our computing, video, and advertising platforms. These platforms are providing real economic opportunities for developers, creators, and publishers in every corner of the world. Last year, I announced that in the 3-year period from 2014 to 2016, we paid out over $15 billion in revenue to our creator, publisher, and app developer partners in Europe, the Middle East, and Africa via AdSense, YouTube, and Google Play. Our contribution is accelerating. In 2017 alone, we generated an additional $7 billion for these partners.

First, our computing platforms. 10 years ago, we launched the first Android phone with a simple idea -- to build a mobile platform that is free and open to everyone. Today, there are more than 24,000 devices at every price point from more than 1,300 brands. The Android ecosystem supports thousands of phone makers and mobile networks operators who build and sell Android devices. Millions of app developers around the world who have built their businesses with Android and billions of consumers who can now afford and use cutting-edge Android smartphones.

This is all supported by a business model that encourages and enables this open ecosystem to thrive. Continuing this momentum, at I/O, we unveiled a plethora of new features throughout the Android platform, like battery-saving features in Android P, new Google Assistant capabilities on [inaudible], a new Android model to help developers optimize for a variety of devices and form factors. User tools to help use, understand, and control how they are spending time on their device.

Our investments in our computing platforms, as well as an AI in design, are also helping us create momentum in our Made by Google hardware business across Pixel, Home, Nest, Chromecast, and more. We brought Google Home and Mini to Ireland, Australia, Spain, and Mexico. Additionally, bringing the Nest and Google team together is showing early results. The products can more seamlessly work together and our product development and go-to-market are benefiting from the new alignment. There's a lot more to come here in the next few months.

Second, our video platform, YouTube, is growing tremendously. We launched a revamped YouTube Music service across 17 countries and it's receiving great feedback from users and artists alike. This quarter, YouTube rebranded is subscription service, YouTube Premium, featuring originals like our hit series, Cobra Kai, which got 41 million views the first episode alone.

While advertising on YouTube is an incredibly strong and growing source of income for creators, we are also investing in new ways for creators to generate revenue on the platform, including pay channel memberships, merchandise shelves on YouTube channels, and endorsement opportunities through a company we acquired in 2016, FameBit. In fact, half of the creators that used FameBit in the third three months of 2018 doubled their YouTube revenue.

Third, our advertising platforms, which are firing on all cylinders as we put the power of machine learning into marketers' hands. At Google Marketing Live, we introduced our newly rebranded advertising products, our core product Google Ads, Google Marketing Platform, which provides analytics and ad serving for large marketers and agencies, and Google Ad Manager, our monetization engine for publishers.

We also announced a new ad format powered by machine learning called Responsive Search Ads. It automates the manual process of building [inaudible] ads and optimizes them in real time to show the best-performing ad for each search query.

Advertisers also got a first look at Local Kampaigns and Smart Campaigns. Local Campaigns are designed exclusively to drive foot traffic to local businesses. Smart Campaigns are now the default for new S&B advertisers. Small business owners love the simplicity and the results. This quarter, we announced shopping and commerce partnerships with leading global retailers like Terraform, designed to give people the power to shop wherever and however they want. Terraform is a great example of how we can partner deeply with companies, bringing our shopping and ads and cloud products together for them. They recently chose to migrate from Office to G Suite for their more than 160,000 employees and have selected us as their main cloud provider, based on our ability to support the company's digital transformation.

Speaking of our efforts to help businesses succeed in the cloud, our cloud business has great momentum. It's a natural extension of our longtime strengths in computing, data centers, and machine learning. We have developed these over many years and they power our own services in the cloud and are now helping others. This week's Google Cloud Next event will have more than 20,000 FMDs, up from over 2,000 at our cloud conference in 2016, with over 250 customers speaking. I won't spoil any of the surprises, but I do want to call out Google Cloud's momentum.

Success of our vertical strategy and customer-centric approach was illustrated by key wins, including Domino's Pizza, Sound Cloud, and PricewaterhouseCoopers. Target is migrating key areas of its business to Google Cloud Platform. Financial institutions are increasingly turning to the cloud to modernize their systems, explore new business models, and improve customer experiences. New customers include Carrefour. We also have a rapidly growing business for our specialized cloud AI services.

Air Asia expanded it's relationship with us to use machine learning and data analytics. We are seeing an acceleration in business [inaudible] in Chromebooks, a more secure and cost-efficient way to enable their employees to work in the cloud. In Q2, unit sales of managed Chromebooks grew by more than 175% year-over-year. We saw deployments at customers like [inaudible]. To support our growing global customer base, we continue to invest in new cables, open new regions in Finland and Los Angeles, and announced the Zurich region. We now have 17 open regions with 3 more on the way.

Before I close, I want to give a quick shout-out to the work that we are doing to build great specialized products for the next wave of people coming online for the first time in countries like India, Indonesia, Brazil, and Nigeria. Many of whom experience the web only through their mobile phone. This is a big area of focus for us. Through a great partnership with Indian Railways and RailTel, we have hit our goal of enabling high-speed, public Wi-Fi in 400 train stations across India. We have also rolled out this Google station model in Indonesia and Mexico, with more to come soon.

To help spur AI innovation in Africa, we recently announced a new Google AI research center in Ghana, with the goal of bringing together top machine learning researchers and engineers to explore AI research and applications in Africa and beyond. Of course, our commitment to help communities and people benefit from the digital economy extends beyond the products that they use. Last month, as part of our broader Grow With Google effort, we expanded the Google IT Support Professional Certificate Program to more than 25 community colleges in the U.S. This will give students an opportunity to learn skills needed to jump start their careers in IT support.

I want to thank Googlists for their hard work, which helps us create products that billions of people love and use every day.

With that, I'll hand it back over to Ruth.

Ruth Porat -- Chief Financial Officer

Thank you, Sundar. We will now take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen on the phone lines, if you would like to ask a question at this time, please press * then the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key.

And our first question comes from Eric Sheridan of UBS. Your line is now open.

Eric J. Sheridan -- UBS Securities LLC -- Analyst

Thanks you very much. Two questions if I can. Sundar, for you, following up on your comments, we've seen all of these partnerships announce in the commerce space. I want to understand how those partnerships might evolve over the next couple years, what Google brings to the table for those partners, what it might do for the advertising services business, as we think long term.

Then, we've been getting a lot of questions on Waymo in the quarter. Is there any sense you can give us of some of the key investment milestones or how we should be thinking about capital allocated to the Waymo business in the coming years? Thanks so much.

Sundar Pichai -- Chief Executive Officer

On the commerce front, obviously, it's a natural sector, I think for us to drive partnerships. We already have deep advertising relationships with many of these providers. Increasingly, shopping is an area where we are bringing to work together. Finally, I think cloud is another important way by which we can start working together. I think we are seeing a lot of traction there. I gave the Carrefour example.

We also announced a strategic partnership and significant investment in JD.com, the second largest e-commerce company in China. Today, we are already, for example, in Google Express, we are partnering with over a hundred merchants, including national retailers like Walmart, Costco, Target, Walgreens, and PetSmart. So, there's a lot of traction. I think we are building upon these relationships, trying to have more holistic conversations across the breadth of our offering. I think I see that all being very synergistic.

Ruth Porat -- Chief Financial Officer

In terms of Waymo, we remain very excited about the opportunity with Waymo. You've seen us talk about our progress on a number of fronts. I think the main point it is still very early, but in terms of our progress, in 2018 the focus has been to launch the commercial rider program in Phoenix that we've talked about, looking to do that by year end. We do view that as a first step in building a more fully rolled out rider program in the future. As we've discussed on prior calls, we continue to trial the program in Phoenix with an emphasis on delivering a safe experience that delights users.

We've also continued to build out our vehicle relationships. You saw announcements regarding FCA and Jaguar. We're expanding our testing to more states. We're also working on additional areas such as logistics and deliveries. We talked this past quarter about licensing the technology for personal use vehicles and we're also focused on working with cities to help strengthen public transportation.

More specifically, your focus on capex, as I said, we're excited about the long-term opportunity, but creation of a new market does take time and then on the capex versus opex, the way it works, is once the commercial program is up and running beyond what's viewed as more of a development or R&D phase, then much of the investments are capex versus opex, and that's for cars, sensors, and any other spend. So, we're excited. We do think it's a really important market, but it is still very early.

Eric J. Sheridan -- UBS Securities LLC -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Heather Bellini of Goldman Sachs. Your line is now open.

Heather Bellini -- Goldman Sachs & Co. LLC -- Analyst

Great. I just had two questions. One, I was wondering if you could talk about what you've seen thus far with the rollout of GDPR? Anything you could share with us and just how that's played out versus your expectations at this point.

Then, Sundar, as you mentioned, with Google Next upon us and you guys are talking very positively about the business, but are there any more stats you can share with us, even about the growth rates in G Suite or GCP or combined? Then when we think about this business scaling over time, is there any reason to think that the pace of gross margin progression would be materially different than say Azure or AWS at similar revenue levels? Thank you.

Sundar Pichai -- Chief Executive Officer

Thanks, Heather. On GDPR, obviously it's been something we've been working on for a long time -- well over 18 months. But the rollout just happened toward the end of second quarter, so it's a bit early to assess anything, but for us, it's been super important to get it right and we've always been focused on user privacy. But it's been a big change for a lot of our partners as well, and so we're working closely with our partners and regulators and committed to doing it right, but it's too early to tell.

On Google Next and Cloud, obviously, the conference is tomorrow, so I will hold for the announcements there. A couple things, G Suite is definitely seeing a lot of momentum. We definitely have noticed, now I think it can definitely serve the needs of a large enterprise. It's clear. I gave the Carrefour example. But increasingly, we are seeing big companies take on the migration so that's been for sure a positive development.

On Cloud, I think we're investing for the long run. We are definitely seeing traction. A lot of our effort from a product and technology standpoint, we are definitely there and differentiated. It's been a lot about investing in our go-to-market efforts. As we do it, both developing our in-house strengths, but also as partnering, those things are beginning to pay dividends. Hopefully, you'll hear more details at tomorrow's conference.

Heather Bellini -- Goldman Sachs & Co. LLC -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Brian Nowak of Morgan Stanley. Your line is now open.

Brian Nowak -- Morgan Stanley & Co. LLC -- Analyst

Thanks for taking my questions. I have two. The first one on the Google Assistant and the hardware on the Google Home Minis. I was curious if you could just talk about sort of early learnings and differences in customer behavior with how they interact with those devices as opposed to Mobile Search on the phones. I know you're always very focused on the long-term value proposition for your users and advertisers. Can you talk to what the focus in the hardware is long-term for users and advertisers. And Sundar, I appreciate your color on India and Indonesia in the emerging markets. Talk about how you're strategically trying to position yourself or the business potentially beyond advertising in payments or other areas in those countries, if you could, please.

Sundar Pichai -- Chief Executive Officer

On Google Assistant, obviously, we see Google Assistant as an important evolution. Obviously, it's early days but it's already exciting to see. People definitely are pushing the boundaries of what they can do with these devices. Home control and automation is a good example of the kind of use case that's very different consumer behavior. And which is why our assets [inaudible] end up mattering over time. So, there's a lot more actions. People are trying to get things done, which is definitely areas where we are focused on.

But I think it's important to understand the experience not just in the context of Home and Home Mini, but also you have core mobile experience, how it evolves on the phone, and across the streams you will have in our life. So, we are taking the end-to-end user experience in mind and that's where all the investments we have done over many, many years I think will come into play as the product evolves.

On your question about emerging markets, the user growth there is extraordinary to see. We're seeing it across all our products. So, all our major products. Products which have over a billion users each, they are all doing well in these markets. That's where most of the growth is going to come from. It's an important area of focus. We do see unique opportunities in these markets, which are different from the markets we are in here in our more mature markets.

You highlighted Payments as a good example. You've seen us [inaudible] specifically with Google Cares in India. We will look to do more like that and beyond just getting our products working better, we are going to be opportunistic. We are investing in talent in these countries. There is a lot of innovation which is going to happen from these countries, both for their own markets and for the world beyond. And we want to be in a position to do that well.

Brian Nowak -- Morgan Stanley & Co. LLC -- Analyst

Great, thanks.

Operator

Thank you. Our next question comes from Doug Anmuth of JP Morgan. Your line is now open.

Douglas Anmuth -- J.P. Morgan Securities -- Analyst

Thanks for taking my questions. I'd like to first, for Ruth. You talked about the higher cost as you shift to machine learning driven business and then also your tech upgrade cycle around machines. Can you give us a sense of where you are in making those transitions and absorbing those investments from a cost perspective?

Then, Sundar, mobile strength clearly in the quarter. Can you just help us understand better how machine learning and AI are driving the stronger growth in Mobile Search and if there's any specific innovations or products you can point to that are driving that out-sized growth? Thanks.

Ruth Porat -- Chief Financial Officer

In terms of your first question and machine learning and you're kind of getting at cycle, you're really seeing it in two places. Part of it, as I called out, is with respect to opex, where hiring what you're seeing is the investments we're making across the board. It's Ads, it's Cloud, it's Hardware, it's the Assistant, but it's also very much in machine learning and we're really proud of the team that we have, given the opportunity set that they're able to address.

I think you were getting more broadly at capex. The way we're focused on capex, as I said last quarter as well, we view this as a lens into our outlook for growth and the required additional compute capacity. There are a number of growth drivers there. Part is really to support growth that we're seeing in our Search and Ads business. That's really consistent on the momentum that we've commented on today and the exciting opportunities that we see to further enhance the user and advertiser experience. It's also for our newer businesses, as I noted in opening comments, and then very importantly, it reflects the importance of machine learning across our products, including Search and Ads.

We've talked about this in the past, machine learning is more compute intensive, but it also opens up more services and products across Alphabet and that's what we're investing in to make sure that we've got the capacity with best-in-class compute capacity. The build is really machines, data centers and network infrastructure, and just to make sure, to put a fine point on it, while we're ensuring that we're well positioned to support the growth we see, we do constantly remain focused on efficiency per unit of compute. We've talked about that on many prior calls and our investing here for long-term value creation, thoughtfully in order to be able to pursue the opportunities that we see ahead of us.

Sundar Pichai -- Chief Executive Officer

Doug, on your question on how is machine learning driving the mobile search experience? I think the key thing is it's doing it at a deeper foundational level. We've obviously used machine learning across the board, be it ranking and actually understanding the intent and the context around the query and getting you the right answer. I think the improvements are happening continuously.

I would just say we are getting deeper in terms of what we are able to do. In terms of specific innovations, it's super important to understand -- I gave the Translate example earlier. While it may seem like a specific use case, obviously we can do Translate well because of machine learning.

But where it helps us is we want Google to be the source you think of when you run into a problem. The fact that the data shows up during the workup in Russia, our usage spiked up, to me shows that when people are running into new things, new experiences, when they have questions on their mind, Google is what they are reaching out to. I think the way we continue to do that well is increasingly by using machine learning. So, that's the depth to which we think about this.

Douglas Anmuth -- J.P. Morgan Securities -- Analyst

Thank you both.

Operator

Thank you. Our next question comes from Anthony DiClemente of Evercore. Your line is now open.

Anthony DiClemente -- Evercore -- Analyst

Thank you very much. First for Sundar, you talked about Android in your prepared remarks. In your blog post, you said that you're concerned that the Android ruling from the EC sends a troubling signal in favor of proprietary systems over open platforms. So, I wonder how are you thinking about the possible business impact from this Android ruling, specifically untying the Play Store from Search in the Chrome browser. Does it in any way change your strategic approach for Android going forward?

Then, for Ruth, on the theme of opex investment trends, if we isolate just the other revenue businesses, Cloud, Play, and Hardware. All growth drivers, but clearly structural different in terms of the competitive landscape and profitability. You said most of the headcount additions are in Cloud. But I would love to understand more about how you prioritize investment across Cloud, Play, and Hardware, those three. Thank you.

Sundar Pichai -- Chief Executive Officer

Andrew, as I said in my blog post, Android has really worked well, I think globally, for users for everyone in the ecosystem. You can clearly see there's robust competition. There's a lot of innovation, lower prices that has made Android possible at every price point, and so I think overall it's created more choice for everyone, not less. We are analyzing the position and I think it's too early to comment or speculate beyond what we've already said. But we will always take a constructive approach. We'll appeal the Commission's decision and take the due process available to us.

But we are also looking forward to finding a solution above all that preserves the enormous benefits off Android to users and so on. There's more work to be done and I think it'll become clear as it goes along. But I'm confident that we can find a way to make sure Android is available at scale to users everywhere.

Ruth Porat -- Chief Financial Officer

In terms of your question on investment priorities, I think one of the most important points to underscore is that one of the biggest opportunities for investment continues to be in our Ads business, where we're continuing to invest meaningfully given the opportunity set that we see there. Sundar commented on some of them, as did I. Looking at opportunities to enhance the user experience, to continue to improve tools for advertisers, both of which extend the growth there. That's for mobile and what we're increasingly seeing is as we focus on mobile, the benefits are cross-platform and help explain the growth we're seeing in Desktop and YouTube.

So, we are continuing to invest here. I don't want to leave you with an answer with a notion that the investment is just going to the newer businesses. Then more specifically to your question, what we look at is the opportunity set. Each one of these is different. When we start with Cloud, as Sundar commented, given the core capabilities that we are building upon, our technical infrastructure, security, apps, machine learning, analytical tools, our view is that we're addressing a rapidly growing market with the core pillars that are needed to win.

What has been the recurring theme on these calls is the need to further build out our go-to-market capabilities and ensure that we've got the functional requirements that enterprise customers deserve. So, it's really looking at the scale of opportunity, the pace of investment that can be done effectively and therefore position us well. Our Hardware business continues to deliver significant growth, particularly with the sales of the Home family of products. You've seen us invest there.

We talked about the HTC acquisition last quarter because this is a scale business and the ability to operate as effectively as possible underscores the types of investment we're making. Play continues to benefit from broad-based app strength and has been a long-standing strength of ours and we're continuing to invest as needed there.

Anthony DiClemente -- Evercore -- Analyst

Thank you both.

Operator

Thank you. Our next question comes from Mark Mahaney of RBC Capital Markets. Your line is now open.

Mark Mahaney -- RBC Capital Markets -- Analyst

Great. Thanks. Two questions. It seems like your commentary on Cloud is very positive. It seems like that's also what we're hearing from Microsoft and my guess is from Amazon what they're seeing. Do you think we're just at a broad industry inflection point in terms of cloud adoption and any thoughts as to why we're seeing it now?

And then I have a question on advertising. There's this big bucket of ad spend; it's called trade promotion spend. That's largely been offline, I think. It's almost as big on a global basis as kind of TV-brand advertising. Any thoughts on that as an opportunity, whether there's an ability for that to really migrate heavily online and Google's ability to tap into those dollars? Thank you very much.

Sundar Pichai -- Chief Executive Officer

On the first question on Cloud, for sure I do think there is an inflection point. That's why it feels far from a zero-sum game, I think. All the major players are seeing traction. To me, the reason is typically when you look at enterprises, once you've deployed and you have an architecture, you try and stay on it as long as you can in many cases because change is hard. But this is a case in which the benefits are super clear.

Over time, I think there's a tremendous cost to your business from being on the wrong architecture, especially if you need to digitally transform yourself. Thinking through the cloud architecture becomes an important way by which you're improving your business. So, I think, at a foundational level, it's clearly there on everyone's minds. It's not just-CEOs are asking about cloud. Almost all businesses I deal with, I can clearly see the question is on the mind of their CEO. So, I think it's important.

I also think it's going to be -- businesses are going to embrace multiple clouds over time, too. So, I think not only is this early, but I think it is going to transform and there's a lot of opportunity here and our goal here is something we view as something we've built experience over 20 years and we are thoughtfully gaining strength and committed to do it for the very long term.

Ruth Porat -- Chief Financial Officer

Then in terms of trends advertising, to your question, we have talked about this quite a bit in the past, over 90% of commerce is still offline and we do see a great opportunity for digital play a bigger role in that and tap into our budgets, into other budgets that have traditionally been there.

We are quite focused on the advertising opportunities, as I said, and the fac that ad budgets are offline and as we focus on these are opportunity and the tools for advertisers, we view that as another opportunity.

Mark Mahaney -- RBC Capital Markets -- Analyst

Thanks, Ruth. Thanks, Sundar.

Operator

Thank you. Our next question comes from Dan Salmon at BMO Capital Markets. Your line is now open.

Daniel Salmon -- BMO Capital Markets -- Analyst

Good afternoon, everyone. Thanks for taking my question. Sundar, you mentioned in your prepared remarks, or highlighted at least the launch of Local Campaigns, at Marketing Live a couple of weeks ago. I recognize that's an initiative that will help drive demand across a number of Google properties. I'm curious in particular about Maps. With it being a product aimed at driving store visits, one would assume Maps will play an interesting part in that.

In the past when we've asked you about Maps, it was focused more on getting the user experience right. So, my question is, do you see Local Campaigns as something that drives a bit of an incremental level of monetization of Maps? Thank you.

Sundar Pichai -- Chief Executive Officer

I think it's a good question. Local is an extraordinary use case in mobile. Local mobile searches are growing faster than Mobile Search for us. They have increased by almost 50% in the last year alone. We are continuing to invest in building a local experience that benefits merchants, users, and advertisers.

Local Campaigns is something new which we announced at Google Marketing Live a few weeks ago. It's a new campaign where if you're a local business, it's designed to drive foot traffic to you. You provide us with your budget, business locations, and creatives and we use machine learning to automatically optimize the ads to appear across our properties.

Along with that, you've rightly noticed that we are beginning to experiment with new ad formats, which we've had in beta, but we're pushing on them a bit more in Maps itself. Both promoted places and place page ads. So, these are important ways by which we are exploring the commercial opportunity around Maps. I've always felt Maps is a tremendous asset we have.

We have really focused on the user side of things and we will continue to do so because the growth is very high. So, we see a lot of headroom. But as that experience is -- we get a better understanding of it, we are developing our views on how we can bring monetization experiences. So, these are all steps in that direction, but we'll take it slowly and we'll continue to evolve it.

Daniel Salmon -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Brent Thill with Jefferies. Your line is now open.

Brent Thill -- Jefferies LLC -- Analyst

Good afternoon. Ruth, the U.S. and Asia business accelerated sequentially modestly. But Europe was done a touch and I think there have been many questions around did GDPR have any impact? Sundar said it was too early to call, but is that just completely unrelated to what happened and maybe there's something else that's going on that resulted from the small downtick?

Ruth Porat -- Chief Financial Officer

Yeah, the way we look at it is we're pleased with the strength in each of the regions. At 19% year-over-year growth in EMEA on a fixed basis, we're pleased with the strength in the business. As Sundar said, I think it is too early to comment on GDPR.

We then hope that the geographics give you a better sense of what are the dynamics in each of the various regions. As we both commented on, as long as you raised the regional question, I've got to comment on APAC here. We're really pleased with the growth -- 34% on a fixed FX basis and it underscores Sundar's comments about terrific products and rapidly growing markets, as well as a superb leadership group. Mobile strength is the key there as well. We're really pleased about the breadth by country that we're seeing. We're very focused on the region. As we look across the globe, we're pleased with the facts that all regions are contributing nicely.

Brent Thill -- Jefferies LLC -- Analyst

Okay. A quick follow-up for Sundar. You mentioned on the Cloud business that you're getting strong traction among some of the big financial institutions. One of the big questions we get is around the heavily regulated industries like healthcare, financial. It feels like you're starting to get better reference ability there. Are you happy with where you sit across the more heavily focused industries now versus the tech focused industries where you sit right now?

Sundar Pichai -- Chief Executive Officer

Definitely. I think that's where a lot of our investments have gone in. Getting the necessary certifications needed to bring on the industry and building the features that you need. That's clearly starting to have an impact, both on GCP, but also G Suite. We definitely are going to continue to build out our capabilities and we'll be going after the opportunities in these areas very seriously.

Brent Thill -- Jefferies LLC -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Colin Sebastian with Robert W. Baird. Your line is now open.

Colin Alan Sebastian -- Robert W. Baird & Co., Inc. -- Analyst

Okay. Thanks very much. I have a couple. Maybe first going back to the commerce theme. I wanted to ask about shopping actions and the level of adoption you might be seeing with that format, and more generally where you envision monetization for Google Assistant, if we should still expect to see more of a transactional bent to that platform?

Then on TAC, Ruth, I wonder if it's worth adding a little more color perhaps on the timing or how much of the second quarter benefited from the moderation in growth and Sites TAC, just so we can better expense as to how to model that expense item over the next few quarters. Thanks.

Sundar Pichai -- Chief Executive Officer

Colin, on Google Assistant and Shopping Actions, I do think it's been exciting to see the improvement there. I would still like the experience to evolve a lot more before we play around with monetization. In all of these areas, we always have a high bar to make sure the user experience is working well. You have see us do that with Maps or something like that.

I think today while we have taking promising steps with Shopping Actions, for all of this to really work well and to delight users, I still feel we have some work ahead of us and that's what we are focused on. We'll stay focused there, get the experience, and that will give us newer venues to monetize it.

I've seen this with YouTube now. Beyond Ads, we are experimenting with a lot of new formats and the same thing here. I'm pretty confident about our ability to do that well if we get the user experience right.

Ruth Porat -- Chief Financial Officer

In terms of TAC, as we've talked about in the past, TAC as a percentage of revenues is affected by quite a number of factors. The main point is that we do continue to expect the TAC rate to increase on a year-on-year basis. The primary reason is the one we've talked about with you in the past, it's the underlying shift to mobile, which carries higher TAC than desktops. On a year-on-year basis, that's the trend that you're really seeing is the ongoing strength of mobile.

Over the past four quarters, changes in partnership agreements have also been a driver of increases in the TAC rate and then there are a host of other factors that we've talked about that can have an impact in any quarter, like device mix or partner mix or mix of organic and paid distribution points.

As we called out last quarter, we did expect the pace of year-on-year growth in the Sites TAC rate to slow beginning in this quarter, the second quarter. You can clearly see that in the data. As we've repeatedly said, it is most instructive to focus on year-on-year changes given the strategic of this shift to mobile and mobile growth. And so, variations in quarter-over-quarter moves are less instructive.

Colin Alan Sebastian -- Robert W. Baird & Co., Inc. -- Analyst

Thank you.

Operator

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

Michael B. Nathanson -- MoffettNathanson LLC -- Analyst

Thanks. One for Sundar and one for Ruth. Sundar, firstly, you went through a lot of your initiatives in your opening comments, but didn't mention Verily. Have you talked a bit about what the bottlenecks are that need to be solved? Either by you or your clients before you can scale the Verily opportunity?

Then for Ruth, you've been clear the capex ramp is due to your investing ahead of growth. What is the usual timeframe do you see where those investments pay off and what factors would make the capex to sales ratio to start growing even faster from here? So, those are my questions.

Sundar Pichai -- Chief Executive Officer

Broadly, Verily is clearly set up as an Other Bet and they are doing really important work on healthcare. If you look at the recent progress on their diabetes monitoring and so on. They're in deep work and they have a lot more to talk about.

Across healthcare, we see a big opportunity for both Google and Alphabet. It's a vertical which is very important for Cloud. We are obviously helping a lot of healthcare partners across their needs. Verily is definitely doing very specialized solutions in this area. We'll have a lot more to say on all of this over the course of time.

Ruth Porat -- Chief Financial Officer

With respect to capex, I think our view is what you're seeing here is an aggressive pace of investment given our outlook for growth. And as I've said, the required additional compute capacity, we are quite focused on the full-resource utilization across businesses. If I go back a couple of years, when we incorporated stock-based compensation into the way we're talking about the businesses, I made the point that is helpful, both externally and internally.

Looking at resource utilization, the same is clearly true of capex and we're quite focused on long-term value creation, focused on ensuring that we're pursuing attractive opportunities in a prudent, appropriate way to capture the opportunity while making sure that we're looking at the full, again, resource requirement.

So, at this point, that's an interesting way of framing the question -- how does it grow even faster from here? We're quite focused on this being an aggressive pace and an appropriate one, given the opportunities that we see and it across data centers, machines, and network infrastructure, as I said.

Michael B. Nathanson -- MoffettNathanson LLC -- Analyst

Thanks, Ruth.

Operator

Thank you. Our final question comes from the line of Justin Post of Merrill Lynch. Your line is now open.

Justin Post -- Merrill Lynch -- Analyst

Great, thank you. I just want to get into website growth. First, maybe you can help us a little bit to understand strength in Mobile Search. Are there any new ad formats or ad changes? You mentioned local. Anything to call out there?

Then just wondering, given the YouTube controversies last year, did YouTube accelerate this quarter? What are some of the big content areas that you're investing in? Thank you.

Ruth Porat -- Chief Financial Officer

So, in terms of Sites revenue, I think our view is the ongoing strength reflects our focus on improving the user experience and enhancing tools for advertisers. Both Sundar and I have spoken about them. We've got an intense focus on innovation that we've discussed previously that's enabled us to deliver over a hundred innovations each quarter. A really exciting area is the benefit of machine learning.

It's a valuable driver of our growth, not only enhancing experiences for users, but the tools that we talked about for advertisers and for app developers, really helping them find the right audience to help them the right audience to be able to optimize campaigns at scale, to deliver more relevant and higher quality adds. Sundar talked about a number of them. At Google Marketing Live, we really highlighted what we're seeing there and the benefits. Whether we're talking about responsive search ads or local campaigns, smart shopping campaigns.

Another example is universal app campaigns. Across the board, and again, I've made this comment previously, but the benefit we're seeing on mobile is extending to the growth opportunities across platforms.

Sundar Pichai -- Chief Executive Officer

To add to that, a good way to think about that is today there's a lot of complexity you need to deal with as an advertiser. Increasingly, we are using machine learning to do all the hard work and get them to focus on the business problem they are trying to solve. That turns out to be a big driver overall.

On YouTube, we definitely are continuing to see great product momentum. The user at option and interest and our metrics are very strong, continues to grow, and the growth is global and we see it across many verticals. Overall, we've invested a lot in making sure we're developing the content responsibly. It's been a big area of focus.

Across Google, we are investing a lot in people to review the content that's going on, improving the policies, and again, using machine learning to make all of this work better. I think people are noticing it, including our advertisers and they are engaging with the platform more. So, I would say overall there's a lot of momentum there and I'm excited about it.

Operator

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Ellen West for any closing remarks.

Ellen West -- Head of Investor Relations

Thanks, everyone, for joining us today. we look forward to speaking with you again on our third quarter call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 64 minutes

Call participants:

Sundar Pichai -- Chief Executive Officer

Ruth Porat -- Chief Financial Officer

Ellen West -- Head of Investor Relations

Eric J. Sheridan -- UBS Securities LLC -- Analyst

Heather Bellini -- Goldman Sachs & Co. LLC -- Analyst

Brian Nowak -- Morgan Stanley & Co. LLC -- Analyst

Douglas Anmuth -- J.P. Morgan Securities -- Analyst

Anthony DiClemente -- Evercore -- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Daniel Salmon -- BMO Capital Markets -- Analyst

Brent Thill -- Jefferies LLC -- Analyst

Colin Alan Sebastian -- Robert W. Baird & Co., Inc. -- Analyst

Michael B. Nathanson -- MoffettNathanson LLC -- Analyst

Justin Post -- Merrill Lynch -- Analyst

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