Alphabet Inc. Q2 2025 earnings call

Thank you. Good afternoon, everyone, and welcome to Alphabet's Second Quarter 2025 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler, and Anat Ashkenazi. Now, I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our investor relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise.

I'll turn the call over to Sundar.

Thanks, Jim. Good afternoon, everyone. Q2 was a standout quarter for us, with robust growth across the company. As you saw at I/O, we are leading at the frontier of AI and shipping at an incredible pace. AI is positively impacting every part of the business, driving strong momentum. This quarter, Search delivered double-digit revenue growth. Our new Search features continue to perform well. AI Mode has launched in the U.S. and India and is going well, while AI Overviews now has over 2 billion monthly users across more than 200 countries and territories and 40 languages. I'll give some more details on Search in a moment. We continue to see strong performance in YouTube as well as subscriptions, reflecting great momentum across these high-growth businesses. In the U.S., Shorts now earn as much revenue per watch hour as traditional in-stream on YouTube.

In some countries, it now even exceeds in-stream straight. Cloud had a great quarter of strong growth in revenues, backlog, and profitability. Its annual revenue run rate is now more than $50 billion. We are seeing significant demand for our comprehensive AI product portfolio. Of course, this is all possible because of the long-term investments we have made in our differentiated full-stack approach to AI. This spans AI infrastructure, world-class research, models and tooling, and our products and platforms that bring AI to people all over the world. I'll briefly touch on the AI stack before turning to quarterly highlights. First, AI infrastructure. We operate the leading global network of AI-optimized data centers and cloud regions. We also offer the industry's widest range of TPUs and GPUs, along with storage and software built on top. That's why nearly all Gen AI unicorns use Google Cloud.

It is why a growing number, including leading AI research labs like Safe Superintelligence and Physical Intelligence, use TPUs specifically. Our AI infrastructure investments are crucial to meeting the growth in demand from cloud customers. Next, world-class AI research, including models and tooling. We continue to expand our Gemini 2.5 family of hybrid reasoning models, which provide industry-leading performance in nearly every major benchmark. In addition to improving our popular workhorse model, Flash, we debuted an extremely fast Flashlight version. We achieved gold medal-level performance in the International Math Olympiad using an advanced version of Gemini with Deep Think. We cannot wait to bring Deep Think to users soon. We have some of the best models available today at every price point. Our 2.5 models have been a catalyst for growth, and 9 million developers have now built with Gemini.

I also want to mention Veo 3, our state-of-the-art video generation model. It's been a viral hit with people sharing clips created in the Gemini app and with our new AI filmmaking tool, Flo. Since May, over 70 million videos have been generated using Veo 3. We recently introduced a feature in the Gemini App to turn photos into videos, which people absolutely love. It's also rolling out to Google Photos users starting today. Third, our products and platforms. We are bringing AI to all our users and partners through surfaces like Workspace, Chrome, and more. The growth in usage has been incredible. At I/O in May, we announced that we processed 480 trillion monthly tokens across our surfaces. Since then, we have doubled that number, now processing over 980 trillion monthly tokens, a remarkable increase.

The Gemini app now has more than 450 million monthly active users, and we continue to see strong growth in engagement, with daily requests growing over 50% from Q1. In June alone, over 50 million people used AI-powered meeting notes in Google Meet. Powered by Veo 3, our new short video product in Workspace called Google Vids reached nearly 1 million monthly active users. This month at Samsung Galaxy Unpacked, we announced new Android and AI features that are available on Samsung's latest devices. We are really pleased with the growth in subscriptions, which caught a boost from our Google AI Pro and Ultra plans. Now, some key highlights from Search, Cloud, YouTube, and Waymo for the quarter. First up is an incredibly exciting moment for Search.

We see AI powering an expansion in how people are searching for and accessing information, unlocking completely new kinds of questions you can ask Google. Overall queries and commercial queries on Search continue to grow year over year. Our new AI experiences significantly contributed to this increase in usage. We are also seeing that our AI features cause users to search more as they learn that Search can meet more of their needs. That is especially true for younger users. Let me go deeper on our new Search experiences. We know how popular AI Overviews are because they are now driving over 10% more queries globally for the types of queries that show them. This growth continues to increase over time. AI Overviews are now powered by Gemini 2.5, delivering the fastest AI responses in the industry.

We also saw strong growth in the use of multimodal search, particularly the combination of Lens and Circle to Search together with AI Overviews. This growth was most pronounced among younger users. Our new end-to-end AI search experience, AI Mode, continues to receive very positive feedback, particularly for longer and more complex questions. It's still rolling out, but already has over 100 million monthly active users in the US and India. We plan to keep enhancing the AI Mode experience for users by shipping great features fast. That includes our advanced research tool, Deep Search, and more personalized responses. Next, Google Cloud. We see strong customer demand driven by our product differentiation and our comprehensive AI product portfolio. Four stats show this. One, the number of deals over $250 million, doubling year-over-year.

Two, in the first half of 2025, we signed the same number of deals over $1 billion that we did in all of 2024. Three, the number of new GCP customers increased by nearly 28% quarter-over-quarter. Four, more than 85,000 enterprises, including LVMH, Salesforce, and Singapore's DBS Bank, now build with Gemini, driving a 35x growth in Gemini usage year over year. Our models are served on our AI infrastructure, which offers industry-leading performance and cost efficiency for both training and inference. Along with our AI accelerators, we introduced new innovations in storage, including Anywhere Cache, which improves inference latency by up to 70%, and Rapid Storage, which delivers a 5x improvement in latency compared to leading hyperscalers. In addition, we have optimized AI software packages, including PyTorch and JAX, with full open-source support for various AI training and serving demands.

We've also integrated AI agents deeply into each of our cloud products. Wayfair is leveraging our databases integrated with AI to streamline data pipelines and deliver more personalized customer experiences. Mattel is leveraging our Gemini-powered data agents and BigQuery to review and act on product feedback more quickly. Target is using our Gemini-powered threat intelligence and security operations agents to improve cybersecurity. Capgemini is utilizing our AI software engineering agents to deliver higher quality software faster by automating tasks from code generation to testing. BBVA says Gemini and Google Workspace are saving employees nearly three hours per week by automating repetitive tasks. It is now rolling it out to 100,000 employees globally. We are also focused on building a flourishing AI agent ecosystem. We introduced an open-source agent development kit, which now has over a million downloads in less than four months.

We also introduced Agent Space, an open and interoperable enterprise chat, search, and agent platform. Gordon Food Service is bringing Agent Space to its U.S. employees, which is enabling better, more efficient decision-making. Over 1 million subscriptions have been booked for Agent Space ahead of its general availability. Turning now to YouTube, Nielsen data shows YouTube has led U..S streaming watch time for over two years. A generation that grew up with YouTube on their devices is now increasingly watching their favorite creators and content on their televisions. That includes billions of sports fans too. Globally, they consume more than 40 million hours of sports content on YouTube annually. In September, we will stream the NFL's First Friday Game of the season live from Brazil. From sports to Shorts, we now average over 200 million daily views on YouTube Shorts.

AI is helping improve our recommendations and auto-dubbing, which translates to better returns for creators and brands by dramatically increasing the potential audiences they can reach. Today, we began rolling out a whole raft of new AI tools for creators on YouTube Shorts. Finally, YouTube continues to diversify its subscription options, recently expanding its premium light offerings to 15 new countries with more to come. Lastly, Waymo continues to scale and expand to safely serve more riders in more places. Last month, Waymo launched in Atlanta, more than doubled its Austin service territory, and expanded its Los Angeles and San Francisco Bay Area territories by approximately 50%. Waymo also launched teen accounts, starting with riders aged 14-17 in Phoenix. Overall, great momentum here. The Waymo Driver has now autonomously driven over 100 million miles on public roads.

The team is testing across more than 10 cities this year, including New York and Philadelphia. We hope to serve riders in all 10 in the future. As I said, a standout quarter. A big thank you as always to our employees and partners for an amazing Q2. Philippp, over to you.

Thanks, Sundar. Hello, everyone. I'll quickly cover performance for Google Services for the quarter, then structure the rest of my remarks around the great progress we're delivering across Search, Ads, YouTube, and partnerships. Google Services revenues were $83 billion for the quarter, up 12% year on year, driven by strong growth in Search and YouTube, partially offset by year-on-year decline in network revenues. To add some further color to our results, the 12% increase in Search and other revenues was led by growth across all verticals, with the largest contributions from retail and financial services.

YouTube saw similar performance across verticals. Its 13% growth in advertising revenues was driven by direct response followed by brand. Starting with Search and other revenues, which delivered over $54 billion in revenue for the quarter. Shifts like AI are what propels our industry forward. Gemini's native multimodality is helping bring the offline audio and visual world back into the online world, creating a number of opportunities for Search. Let me share a few examples. Take visual queries. Google Lens searches are one of the fastest growing query types on Search and grew 70% since this time last year. The majority of Lens searches are incremental, and we're seeing healthy growth for shopping queries using Lens. You can obviously take this to the next level by moving from image to video-based capabilities like Search Live.

There is Circle to Search, which is now on over 300 million Android devices. We have been adding capabilities to help people explore complex topics and ask follow-up questions without switching apps. For example, gamers can now use Circle to Search while playing mobile games to see an AI Overview or answers. Just last week, we brought a new agentic capability directly into Search for all U.S. users with AI-powered calling to local businesses. Finally, shopping. In Q2, we introduced a virtual try-on experience for Search Labs users in the U.S. Now people can try billions of clothing products on themselves virtually. Early results and engagement have been extremely positive, particularly with Gen Z users. We will be bringing this functionality to all U.S. users imminently.

All these innovations are opening up completely new ways for people to use technology, bringing the offline world into the online world in ways that simply have not been possible before. Add in our amazing AI translation capabilities, and just imagine the possibilities. People can access more content in the language, and businesses, large and small, international or local, can reach even more customers. I'm excited about how all of these elements will come together and the opportunities ahead of us in Search. Moving to Ads, where our strategy to reinvent the entire marketing process with AI is delivering value for our customers and our business. Last quarter, we introduced AI Max in Search, a new suite of AI-powered features in existing Search campaigns. Advertisers that activate AI Max in Search campaigns typically see 14% more conversions.

On media buying, Smart Bidding Exploration, the biggest update to bidding strategy in a decade, brings better performance to advertisers by allowing them to bid on less obvious but potentially higher value queries more often. Campaigns using Smart Bidding Exploration see a 19% increase in conversions on average. Demand Gen continues to drive revenue growth and deliver measurable impact for our customers. As an example, Depop, Etsy's resale clothing marketplace, used a Shorts-only Demand Gen campaign to drive new customers to the site. Shorts drove 80% higher brand lift and double-click-through rates versus benchmarks. On creatives, we launched Asset Studio using our latest models to help businesses large and small generate creative assets. Small businesses benefit from top-quality assets and deployment scaling capabilities, but larger businesses can go faster from proof of concept to launch and resize at lower costs.

Over 2 million advertisers now use Google's AI-powered asset generation tools to run ads, a 50% increase on this time last year. Turning to YouTube, where we saw continued strong revenue growth driven by direct response followed by brand. YouTube creators are connected to the global zeitgeist and trusted by their audiences like no others. As part of Brand Connect, we launched Creator Partnership Hub, which allows brands to more easily work with the right creators and tap into cultural moments. We introduced Veo 3, photo to video, and generative effects to Shorts, making content creation easier and offering unexplored avenues for creativity. We're seeing both the volume and the price of ads in Shorts increase, particularly in developed markets.

The feed-based nature of the product allows for more ad opportunities on average, and this growth is further supported by ad formats native to Shorts, AI-powered ad creative resizing tools, improved ad targeting, and the rise in viewer engagement. McDonald's USA harnessed the influence of YouTube creators to ignite awareness for the Minecraft movie meal. It leveraged YouTube Shorts partnership ads to increase its reach, generating a 3.3 times higher view-through rate than the industry benchmark. Finally, on CTV, where the momentum continues. According to the Gauge Report by Nielsen, YouTube has been number one in streaming watch time in the U.S. for more than two years, hitting a record high of 12.8% of total TV viewing in June 2025. In the past 12 months, YouTube ads viewed on CTV screens drove over 1 billion conversions.

We saw strong growth in retail thanks to CTV shopping ads, which allows viewers to shop directly via QR codes, helping us leverage direct marketing opportunities. As always, I'll wrap up with the momentum we're seeing in partnerships, where customers increasingly recognize the strength and breadth of Google's ability to help them transform their business with AI. For instance, a new partnership with PayPal will improve the digital commerce experience for their merchants and customers. PayPal will expand its Google Cloud adoption for AI-driven recommendations, transaction processing, and enhanced security. The partnership also broadens the availability and functionality of PayPal's payment services and capabilities across a range of Google products. In closing, I'd like to thank Googlers everywhere for their contributions and commitment to our success and to our customers and partners for their continued trust. Anat, over to you.

Thank you, Philipp.

My comments will focus on year-over-year comparisons for the second quarter, unless I state otherwise. I will start with results at the Alphabet level and will then cover our segment results. I'll end with some commentary on our outlook for the second half of 2025. We had another solid quarter in Q2, consolidated revenue of $96.4 billion, increased by 14% or 13% in constant currency. Search and YouTube advertising, subscription platforms and devices, and Google Cloud each had double-digit revenue growth this quarter, reflecting strong momentum across the business. Total cost of revenue was $39 billion, up 10%. Tech was $14.7 billion, up 10%. Other costs of revenue was $24.3 billion, up 10%, with the increase primarily driven by content acquisition costs, largely for YouTube, followed by depreciation. Total operating expenses increased 20% to $26.1 billion.

The biggest driver of growth was expense for legal and other matters, which reflected the impact of a $1.4 billion charge related to a settlement in principle of certain legal matters. R&D investments increased by 16%, primarily driven by increases in compensation and depreciation expenses. Sales and marketing expenses increased 5%, primarily reflecting an increase in advertising and promotional expenses. Operating income increased 14% this quarter to $31.3 billion, and operating margin was 32.4%. Operating margin benefited from strong revenue growth and continued efficiencies in our expense base, partially offset by the legal charge I mentioned earlier and a significant increase in depreciation expense. Net income increased 19% to $28.2 billion, and earnings per share increased 22% to $2.31. We generated free cash flow of $5.3 billion in the second quarter and $66.7 billion for the trailing 12 months.

Free cash flow in the second quarter was affected by a sizable sequential increase in CapEx and cash tax payments as we make federal tax payments in the second quarter for both Q1 and Q2. We ended the quarter with $95 billion in cash and marketable securities. Turning to segment results, Google Services revenues increased 12% to $82.5 billion, reflecting strength in Google Search and YouTube advertising and subscriptions. Google Search and other revenues increased by 12% to $54.2 billion. Search and other revenues delivered growth across all verticals, with the largest contributions coming from retail and financial services. YouTube advertising revenues increased 13% to $9.8 billion, driven by direct response advertising, followed by brand. Network advertising revenue of $7.4 billion were down 1%. Subscription platforms and devices revenues increased 20% to $11.2 billion, primarily reflecting growth in subscription revenues.

This growth was driven by YouTube subscription offerings, followed by Google One, with growth in paid subscriptions being the biggest driver of revenue growth. Google Services operating income increased 11% to $33.1 billion. Operating margin was flat year on year at 40.1%, as healthy revenue growth and continued efficiency in our expense base were partially offset by the legal charge I mentioned earlier. Turning to the Google Cloud segment, which delivered very strong results this quarter, revenues increased by 32% to $13.6 billion in the second quarter, reflecting growth in GCP across core and AI products at the rate that was much higher than Cloud's overall revenue growth, and growth in Google Workspace driven by an increase in average revenue per seat and the number of seats. Google Cloud operating income increased to $2.8 billion, and operating margin increased from 11.3% to 20.7%.

The expansion in Cloud operating margin was driven by strong revenue performance and continued efficiencies in our expense base, partially offset by higher technical infrastructure usage costs, which includes the associated depreciation. As we ramp our AI investments, we continue to focus on driving improvements in productivity and efficiency to offset growth in technical infrastructure-related expenses, particularly from higher depreciation. Google Cloud backlog increased 18% sequentially in Q2 and 38% year-over-year, reaching $106 billion at the end of the quarter. This growth was driven by strong demand for our products and services from both new and existing customers. As Sundar mentioned, we have signed multiple billion-dollar-plus deals in the first half of the year. As for Other Bets, in the second quarter, revenue was $373 million, and operating loss was $1.2 billion.

Within Other Bets, we're allocating more resources to businesses like Waymo, where we see opportunities to create additional value. With respect to CapEx in the second quarter, our CapEx was $22.4 billion. The vast majority of our CapEx was invested in technical infrastructure, with approximately two-thirds of investments in servers and one-third in data centers and networking equipment. In Q2, we returned capital to shareholders through repurchase of stock of $13.6 billion and dividend payments of $2.5 billion. Turning to our outlook, I would like to provide some commentary on several factors that will impact our business performance in the second half of 2025, as well as an updated outlook for full-year CapEx. First, in terms of revenues, we're pleased with the overall momentum we're seeing across the business. At current spot rates, we could see a tailwind to our revenue in Q3.

However, volatility in exchange rates could affect the impact of FX on Q3 revenue. As for our segments, in Google Services, advertising revenues in the second half of 2025 will be affected by the following: the continued lapping of the strength we experienced in financial service verticals throughout 2024, and year-over-year comparisons will be negatively impacted by the strong spend on U.S. election in the second half of 2024, particularly on YouTube. In Cloud, as I mentioned, the demand for our products is high, as evidenced by the continued revenue growth and the Cloud backlog of $106 billion. While we have been working hard to increase capacity and have improved the pace of server deployment, we expect to remain in a tight demand-supply environment going into 2026.

Moving to investments, given the strong demand for our Cloud products and services, we now expect to invest approximately $85 billion in CapEx in 2025, up from a previous estimate of $75 billion. Our updated outlook reflects additional investment in servers, the timing of delivery of servers, and an acceleration in the pace of data center construction, primarily to meet Cloud customer demand. Looking out to 2026, we expect a further increase in CapEx due to the demand we're seeing from customers, as well as growth opportunities across the company. We will provide more details on the 2026 CapEx outlook on a future earnings call. In terms of expenses, first, as I mentioned on our previous earnings call, the significant increase in our investments in CapEx over the past few years will continue to put pressure on the P&L, primarily in the form of higher depreciation.

In the second quarter, depreciation increased $1.3 billion year-over-year to $5 billion, reflecting a growth rate of 35%. Given the recent increase in CapEx investments, we expect the growth rate in depreciation to accelerate further in Q3. Second, as we've previously said, we expect some headcount growth in 2025 in key investment areas. In the third quarter, we expect a sequential increase in total headcount additions, due in part to the hiring of new graduates. Third, Q3 will reflect the expense associated with the upcoming August launch of the new Pixel family of products. In conclusion, as you heard from Sundar and Philipp, we're pleased with the momentum in the business and excited about the pace of innovation. Our full-stack approach, which combines AI infrastructure, AI research, and AI products and platforms, positions us well to deliver new products and services across the company.

We're seeing great momentum with our AI efforts, as demonstrated by the increase in cumulative tokens processed. Search revenues are seeing healthy growth, with features like AI Overviews, AI Mode, and Lens offering new ways for users to access information. Cloud has reached an annual revenue run rate of more than $50 billion and is delivering margin expansion while continuing to invest to meet customer demand. YouTube has expanded its addressable market by building new services like Shorts, which now averages over 200 billion daily views. We're excited to see the value our products and services are bringing to customers and partners around the globe. Now I'll turn the call over to the operators, and Sundar and Philippp and I will take your questions.