Alphabet Inc. Q3 2025 earnings call

Thank you. Good afternoon, everyone, and welcome to Alphabet's third 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.

Thank you, Jim. Good afternoon, everyone, and thanks for joining us. This was a terrific quarter for Alphabet, driven by double-digit growth across every major part of our business. We are seeing AI now driving real business results across the company. We delivered our first-ever $100 billion quarter. Five years ago, our quarterly revenue was at $50 billion. Our revenue number has doubled since then, and we are firmly in the generative AI era. In parallel, we have built for the long-term and diversified with successful businesses in Cloud, YouTube, and subscriptions. Our momentum is strong, and we are shipping at speed. As just a few examples, our first-party models like Gemini now process 7 billion tokens per minute via direct API use by our customers. The Gemini app now has over 650 million monthly active users, and queries increased by 3x from Q2.

Cloud had another great quarter of accelerating growth with AI revenue as a key driver. Cloud backlog grew 46% quarter-over-quarter to $155 billion. We crossed 300 million paid subscriptions led by growth in Google One and YouTube Premium. Today, I'll discuss progress in our full-stack approach to AI and then share highlights from Search, Cloud, YouTube, and Waymo. As a reminder, our full-stack approach spans AI infrastructure, world-class research, including models and tooling, and our products and platforms that bring AI to people everywhere. First up, AI infrastructure. Our extensive and reliable infrastructure, which powers all of Google's products, is the foundation of our stack and a key differentiator. We are scaling the most advanced chips in our data centers, including GPUs from our partner NVIDIA, as well as our own purpose-built TPUs. We are the only company providing a wide range of both.

As we announced yesterday at NVIDIA GTC, we are now shipping the new A4X Max instances powered by NVIDIA GB300 to our cloud customers. Our highly sought-after TPU portfolio is led by our 7th generation TPU, Ironwood, which will be generally available soon. We are investing in TPU capacity to meet the tremendous demand we are seeing from customers and partners, and we are excited that Anthropic recently shared plans to access up to 1 million TPUs. Next, world-class AI research, including models and tooling. Our models are world-leading. Gemini 2.5 Pro, Veo, Genie 3, and our viral sensation Nano Banana are among the very best in class. Over 230 million videos have been generated with Veo 3, and more than 13 million developers have built with our generative models. We are looking forward to the release of Gemini 3 later this year. Our research leadership is advancing next frontier technologies.

Last week, we announced that our Willow quantum chip achieved a major breakthrough, running an algorithm 13,000x faster than one of the world's best supercomputers. The result is verifiable, paving the way to future practical applications. Speaking of quantum, let me congratulate Michel Devoret, our Chief Scientist for Quantum Hardware. He received a Nobel in Physics for early research he did in the 1980s. Three Nobels awarded to current Googlers in two years. Incredible. Third, our products and platforms. We are bringing AI to more people and developers than anyone else. In July, we announced that we processed 980 trillion monthly tokens across all our surfaces. We are now processing over 1.3 quadrillion monthly tokens, more than 20x growth in a year. Phenomenal.

This quarter, we took big steps to reimagine Chrome as a browser powered by AI through deep integrations with Gemini and AI Mode in Search, with more agentic capabilities coming soon. In August, at Made by Google, we unveiled our Pixel 10 series of devices. They are the first with our most powerful chip designed to run on Gemini Tensor G5. They are our best-reviewed devices ever. Last week, we launched Android XR, our new operating system, with Samsung's Galaxy XR device. It brings new ways to use headsets and glasses with Gemini at the core. Now, turning to highlights from Search. AI is driving an expansionary moment for Search. As people learn what they can do with our new AI experiences, they are increasingly coming back to Search more. Search and its AI experiences are built to highlight the web, sending billions of clicks to sites every day.

During the Q2 call, we shared that overall queries and commercial queries continue to grow year-over-year. This growth rate increased in Q3, largely driven by our AI investments in Search, most notably AI Overviews and AI Mode. Let me dive into the momentum we are seeing. As we have shared before, AI Overviews drive meaningful query growth. This effect was even stronger in Q3 as users continue to learn that Google can answer more of their questions. It is particularly encouraging to see the effect was more pronounced with younger people. We are also seeing that AI Mode is resonating well with users. In the U.S., we have seen strong and consistent week-over-week growth in usage since launch, and queries doubled over the quarter. Over the last quarter, we rolled out AI Mode globally across 40 languages in record time.

It now has over 75 million daily active users. We shipped over 100 improvements to the product in Q3, an incredibly fast pace. Most importantly, AI Mode is already driving incremental total query growth for Search. Philipp will talk more about monetization and share how AI is helping people connect with businesses and shop on Search. Next, Google Cloud. Our complete enterprise AI product portfolio is accelerating growth in revenue, operating margins, and backlog. In Q3, customer demand strengthened in three ways. One, we are signing new customers faster. The number of new GCP customers increased by nearly 34% year-over-year. Two, we are signing larger deals. We have signed more deals over $1 billion through Q3 this year than we did in the previous two years combined. Third, we are deepening our relationships.

Over 70% of existing Google Cloud customers use our AI products, including Banco BV, Best Buy, and FairPrice Group. As we scale, we are diversifying revenue. Today, 13 product lines are each at an annual run rate over $1 billion. We are improving operating margin with highly differentiated products built with our own technology. This deep product differentiation starts with our AI infrastructure. We have a decade of experience building AI accelerators and today offer the widest array of chips. This leadership is winning customers like HCA Healthcare, LG AI Research, and Macquarie Bank. It is why nine of the top 10 AI labs choose Google Cloud. We are also the only cloud provider offering our own leading generative AI models, including Gemini, Imagen, Veo, Chirp, and Lyria. Adoption is rapidly accelerating. In Q3, revenue from products built on our generative AI models grew more than 200% year-over-year.

Over the past 12 months, nearly 150 Google Cloud customers each processed approximately 1 trillion tokens with our models for a wide range of applications. For example, WPP is creating campaigns with up to 70% efficiency gains. Swarovski has increased email open rates by 17% and accelerated campaign localization by 10x. Earlier this month, we launched Gemini Enterprise, the new front door for AI in the workplace, and we are seeing strong adoption for agents built on this platform. Our packaged enterprise agents in Gemini Enterprise are optimized for a variety of domains, are highly differentiated, and offer significant out-of-box value to customers. We have already crossed 2 million subscribers across 700 companies. Next, YouTube. In the living room, YouTube has remained number one in streaming watch time in the U.S. for more than two years, according to Nielsen.

Last month marked YouTube's first time as a live NFL broadcaster. This exclusive global broadcast, live from Brazil, drew more than 19 million fans and set a new record for most concurrent viewers of a live stream on YouTube. YouTube Shorts also continues to perform well. In the U.S., Shorts now earn more revenue per watch hour than traditional in-stream on YouTube. At our Made on YouTube event, we rolled out a number of AI-powered features that are helping creators supercharge creation and build their businesses. AI is now streamlining the entire content creation workflow from generative video tools and more efficient editing to AI-powered insights that help creators optimize their channels. We are also using AI to expand monetization, automatically identifying products to make their videos more shoppable. Philipp will discuss in more detail. Finally, Waymo.

Next year, Waymo aims to open service in London, and they are working to bring service to Tokyo. They have also announced expansions to Dallas, Nashville, Denver, and Seattle, and secured permission to operate fully autonomously at San Jose and San Francisco Airports. Autonomous testing continues to scale in New York City. The new Waymo for Business allows enterprises to offer Waymo as a work travel option. We launched Waymo Teens accounts in Phoenix this summer. We are pleased to see usage steadily increase with positive feedback from teens and their parents alike. Waymo's growth and momentum are strong, and 2026 is shaping up to be an exciting year. Overall, a milestone quarter. The incredible work of our teams is driving momentum across the board, and our leadership in AI positions us so well for the opportunity ahead.

I want to thank all of our partners and our employees for their hard work and an excellent Q3. With that, I'll turn it over to Philipp.

Thanks, Sundar, and 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 $87 billion for the quarter, up 14% year-on-year, driven by accelerated growth in Search and YouTube, partially offset by year-on-year decline in network revenues, adding some further color to our results. The 15% increase in Search and Other was led by growth across all major verticals, with the largest contributions from retail and financial services. YouTube saw similar performance across verticals. Its 15% growth in advertising revenues was driven by direct response, followed by brand. Starting with Search and Other revenues, which delivered over $56 billion in revenue for the quarter. As Sundar mentioned, AI is driving an expansionary moment and transforming how people use Google Search.

Our investments in new AI experiences, such as AI Overviews in AI Mode, continue to drive growth in overall queries, including commercial queries, creating more opportunities for monetization. These AI experiences are enhancing how people connect with businesses and shop on Search. We recently added shopping capabilities in AI Mode, which now help people shop conversationally in Search, and we expanded try-on capabilities to more clothing items, now available to anyone in the U.S. Lastly, we're making it easier for consumers to benefit from deals through new loyalty offerings, like personalized annotations on organic results and ads. Looking at monetization, businesses can now tap into our most powerful AI search experiences. Using our most advanced AI models, we can understand and predict intent like never before, unlocking entirely new commercial pathways to provide valuable new consumer connections and helping us monetize even more efficiently.

Rolled out globally in September, AI Max and Search is already used by hundreds of thousands of advertisers, currently making it the fastest-growing AI-powered Search Ads product. In Q3 alone, AI Max unlocked billions of net new queries. By delivering the most relevant ad across surfaces and matching advertisers against additional queries they weren't reaching before, AI Max helps advertisers discover new customers at the exact moment they need their product or service. Kayak, for example, looked to grow conversions while staying within their ROAS goals. After turning on AI Max and Search, they grew the conversion value by 12% in early tests. We continue to infuse generative AI capabilities at every step of the marketing process. We rolled out Imagen 4 in Asset Studio and Product Studio, helping businesses produce more and better creatives. On the measurement front, we enriched the model supporting Meridian, our marketing mix model, with additional variables.

More granular reporting in PMax is making bidding more effective. Financial services company SoFi has been using PMax to meet its ambitious growth targets and helped drive a 39% improvement in its conversion volume year-over-year. Moving to YouTube, where we saw accelerated revenue growth, our recommendation systems are driving robust watch time growth in our key monetization areas, like Shorts and Living Room. As we leverage Gemini models, we're seeing further discovery improvement. On direct response, we're excited about the growth in revenue we're seeing, especially from small and medium advertisers adopting Demand Gen. We also improved performance on Demand Gen, with over 100 launches helping to increase conversion value by more than 40% for advertisers using target-based bidding on YouTube. The retail vertical continues to lead our growth on YouTube, with Demand Gen helping us further monetize shopping-related categories.

Looking at the Living Room, our long-term bet, more advertisers are adopting interactive direct response ads, leading to an annual revenue run rate exceeding $1 billion globally for this format. For our viewers, we continue to give fans greater access across sports while tapping into the best of YouTube's product innovation and creator-led content. Sundar mentioned that we expanded our NFL partnership with our first-ever exclusive global broadcast of an NFL game. Brands loved the opportunity, and we sold all our ad inventory within a couple of weeks. Looking at creators, a significant force behind a thriving YouTube creator economy is the collaboration between creators and brands. Tools like direct linking to deals, websites, and Shorts, and swappable brand segments in long form will soon help creators show how they deliver great value for brands.

Thanks to a collaboration with Dude Perfect, Comcast, Xfinity drove an 8% search lift, beating other Xfinity ads' recall lift on Shorts by 34%. At the same time, it decreased the cost per lifted user by 50% when compared to the next most efficient ad. We continue to invest in AI-powered features that are helping creators supercharge creation and build their businesses. With Veo 3 integration and speech-to-song, creators go from idea to iteration quicker, and new channel insights help them better understand performance. Ending on YouTube with our subscriptions products, we're also seeing momentum with strong growth in offerings such as YouTube Music and Premium and YouTube TV. We're also applying Gemini internally to help us serve customers with increased speed, intelligence, and efficiency. Our sales teams use Gemini enriched with ads knowledge to streamline customer interactions.

This increased productivity by over 10%, led to hundreds of millions in incremental revenue, and frees up sellers to engage with more customers at a deeper, more strategic level. In our Customer Support division, Gemini-powered solutions have managed over 40 million customer sessions so far this year and resolved hundreds of thousands of customer inquiries. We're just getting started. As always, I'll wrap with the progress we're seeing across partnerships, where customers tap into the strength and breadth of Google's products to accelerate their transformation. Revolut, the global financial services company, leverages Google Cloud's Vertex AI platform and Gemini models to help power its advanced customer service chatbot, develop new hyper-personalized financial products, and offer predictive insights. Revolut is also increasing its presence on YouTube, adopting Veo 3 for personalized creatives, making Google a key ads partner for delivering growth and launching new markets.

In closing, I'd like to thank Googlers everywhere for their contributions to our success, and as always, to our customers and partners for their continued trust. Of course, a huge thanks to all of you as we celebrate 25 years of Google Ads. Anat, over to you.

Thank you, Philipp. My comments will focus on year-over-year comparisons for the third 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 fourth quarter of 2025. We had an outstanding quarter in Q3, continuing the strong momentum we've had throughout the year, delivering double-digit revenue growth across Search and YouTube advertising, subscriptions, platforms and devices, and Google Cloud. Consolidated revenue reached $102.3 billion, a 16% year-over-year increase, or 15% in constant currency. Total cost of revenue was $41.4 billion, up 13%. Tech was $14.9 billion, up 8%. Other cost of revenues was $26.5 billion, up 16%, with the increase primarily driven by content acquisition costs, largely for YouTube, followed by depreciation and other technical infrastructure operations costs. Total operating expenses increased 28% to $29.7 billion.

R&D expenses increased by 22%, driven by compensation and depreciation expenses related to our AI efforts. Sales and marketing expenses were flat. G&A expenses increased meaningfully, primarily due to the $3.5 billion charge related to the European Commission fine mentioned in the earnings press release. Operating income increased 9% this quarter to $31.2 billion, and operating margin was 30.5%. Excluding the EC fine, operating income increased 22%, and operating margin was 33.9%. Operating margin benefited from strong revenue growth and continued efficiencies in our expense space, offset by the legal charge and a significant increase in depreciation expense. Other income and expenses were $12.8 billion, primarily due to unrealized gains in our non-marketable equity securities portfolio. Net income increased 33% to $35 billion, and earnings per share increased 35% to $2.87.

We generated free cash flow of $24.5 billion in the third quarter and $73.6 billion for the trailing 12 months. Free cash flow in Q3 benefited from strong operating cash flow and recent tax changes regarding the timing of when research and development costs are expensed and assets are depreciated. This was partially offset by higher CapEx. We ended the quarter with $98.5 billion in cash and marketable securities. Turning to segment results, Google Services revenues increased 14% to $87.1 billion, reflecting strength in Google Search, YouTube advertising, and subscriptions. Google Search and Other advertising revenues increased by 15% to $56.6 billion, representing another robust quarter with continued growth across all major verticals, with the largest contributions from retail and financial services. YouTube advertising revenues increased 15% to $10.3 billion, driven by direct response advertising, followed by brand. Network advertising revenues of $7.4 billion were down 3%.

Subscriptions, platforms, and devices revenues increased 21% this quarter to $12.9 billion, driven by very strong growth in both YouTube and Google One subscriptions. Google Services operating income increased 9% to $33.5 billion. Operating margin declined year-over-year to 38.5%, as healthy revenue growth and continued efficiencies in our expense space were offset by the impact of the EC fine, which was fully reflected in the Google Services segment. Turning to the Google Cloud segment, which again delivered very strong results this quarter, as Cloud continued to benefit from our enterprise AI-optimized stack, including our own custom TPUs and our industry-leading AI models. Cloud revenue increased by 34% to $15.2 billion in the third quarter, driven by strong performance in GCP, which continued to grow at a rate that was much higher than Cloud's overall revenue growth rate.

GCP's growth was driven by enterprise AI products, which are generating billions in quarterly revenue. We had strong growth in enterprise AI infrastructure and enterprise AI solutions, which benefited from demand for our industry-leading models, including Gemini 2.5. Core GCP was also a meaningful contributor to growth. We had double-digit growth in Workspace, which was driven by an increase in average revenues per seat and the number of seats. Cloud operating income increased by 85% to $3.6 billion, and operating margin increased from 17.1% in the third quarter last year to 23.7% this quarter. The expansion in Cloud operating margin was driven by strong revenue performance and continued efficiencies in our expense space, partially offset by higher technical infrastructure usage costs, which includes depreciation expense and other operations costs, such as energy.

Google Cloud's backlog increased 46% sequentially and 82% year-over-year, reaching $155 billion at the end of the third quarter. The increase was driven primarily by strong demand for enterprise AI. As Sundar mentioned earlier, Cloud has signed more billion-dollar deals in the first nine months of 2025 than in the past two years combined. In Other Bets, revenues were $344 million, and operating loss was $1.4 billion in the third quarter. Within Other Bets, we continue to allocate more resources to businesses like Waymo, where we see opportunities to create substantial value. With respect to CapEx, in the third quarter, our CapEx was $24 billion. The vast majority of our CapEx was invested in technical infrastructure, with approximately 60% of that investment in servers and 40% in data centers and networking equipment.

In Q3, we returned capital to shareholders through repurchases of stock of $11.5 billion and dividend payments of $2.5 billion. Turning to our outlook, I would like to provide some commentary on factors that will impact our business performance in the fourth quarter of 2025, as well as an updated outlook for CapEx for the year. First, in terms of revenues, we're pleased with the overall momentum of our business. At the current spot rates, we could see an FX tailwind to our revenues in Q4. However, the volatility in exchange rates could affect the impact of FX on Q4 revenues. As for our segments, in Google Services, year-over-year comparisons in advertising will be negatively impacted by the strong spend on U.S. elections in the fourth quarter of 2024, particularly on YouTube.

In Cloud, demand for our products remains high, as evidenced by the accelerating revenue growth and the $49 billion sequential increase in Cloud backlog in Q3. In GCP, we see strong demand for enterprise AI infrastructure, including TPUs and GPUs, enterprise AI solutions driven by demand for Gemini 2.5 and our other AI models, and core GCP infrastructure and other services, such as cybersecurity and data analytics. As I've mentioned on previous earnings calls, while we have been working hard to increase capacity and have improved the pace of server deployments and data center construction, we still expect to remain in a tight demand-supply environment in Q4 and 2026. Moving to investments, we're continuing to invest aggressively due to the demand we're experiencing from Cloud customers, as well as the growth opportunities we see across the company.

We now expect CapEx to be in the range of $91 billion-$93 billion in 2025, up from our previous estimate of $85 billion, keeping in mind that the timing of cash payments can cause variability in the reported CapEx number. Looking out to 2026, we expect a significant increase in CapEx and will provide more detail on our fourth quarter earnings call. In terms of expenses, first, as I've mentioned on previous earnings calls, the significant increase in our investments in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expenses and related data center operations costs, such as energy. In the third quarter, depreciation increased $1.6 billion year-over-year to $5.6 billion, reflecting a growth rate of 41%. Given the overall increase in CapEx investments, we expect the growth rate in depreciation to accelerate slightly in Q4.

Second, we expect sales and marketing expenses to be more heavily weighted to the end of the year, in part to support product launches and the holiday season. Q3 was a strong quarter, and we're excited with the adoption of our AI products, helped by a rapid pace of innovation and great execution by our teams. This translated into strong momentum in Search, YouTube Ads, subscription platforms and devices, and Cloud, resulting in our first $100+ billion quarter. Now, Sundar, Philipp, and I will now take your questions.