Alphabet Inc. Q4 2025 earnings call

Thank you. Good afternoon, everyone, and welcome to Alphabet's fourth 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. Now I'll turn the call over to Sundar.

Thanks, Jim. Hi, everyone. Thanks for joining us. It was a tremendous quarter for Alphabet. The launch of Gemini 3 was a major milestone, and we have great momentum. Alphabet annual revenues exceeded $400 billion for the first time. This quarter, Search continued to accelerate, with revenues growing 17%. YouTube's annual revenues surpassed $60 billion across ads and subscriptions. Cloud significantly accelerated, with revenues growing 48%, now on an annual run rate of over $70 billion. Backlog grew by 55% quarter-over-quarter to $240 billion, representing a wide breadth of customers driven by demand for AI products. We have over 325 million paid subscriptions across consumer services, with strong adoption for Google One and YouTube Premium.

In addition, we have sold more than eight million paid seats of Gemini Enterprise, which we launched just four months ago. Our Gemini app now has over 750 million monthly active users. We are also seeing significantly higher engagement per user, especially since the launch of Gemini 3 in December. Overall, we are seeing our AI investments and infrastructure drive revenue and growth across the board. To meet customer demand and capitalize on the growing opportunities ahead of us, our 2026 CapEx investments are anticipated to be in the range of $175 billion-$185 billion. Today, I'll provide an update on our AI progress and then share highlights from Search, Cloud, YouTube, and Waymo. First, AI progress across the full stack. Our unrivaled infrastructure serves as the bedrock of our AI stack.

We have the industry's widest variety of compute options. That includes GPUs from our partner, NVIDIA, who announced at CES that we'll be among the first to offer the latest Vera Rubin GPU platform, plus our own TPUs that we have been developing for a decade. In December, we announced our intent to acquire Intersect, which provides data center and energy infrastructure solutions. As we scale, we are getting dramatically more efficient. We were able to lower Gemini serving unit costs by 78% over 2025 through model optimizations, efficiency, and utilization improvements. Next, world-class AI research, including models and tooling. We offer the most extensive model portfolio in the world and lead across text, vision, and image-to-video LLM Arena leaderboards. Gemini 3 Pro drives the state-of-the-art in reasoning and multimodal understanding. It has seen the fastest adoption of any model in our history.

Since launch, Gemini 3 Pro has consistently processed three times as many daily tokens on average as 2.5 Pro. Our latest model powers Google Antigravity, our new development platform, where agents can autonomously plan and execute complex software tasks. It already has more than 1.5 million weekly active users after launching just over two months ago. Our first-party models, like Gemini, now process over 10 billion tokens per minute via direct API used by our customers, up from 7 billion last quarter. Third, bringing AI to our products and platforms. We are shipping innovation at scale to bring helpful AI features to people everywhere.

In January alone, we have launched personal intelligence in AI Mode in Search and the Gemini app. We introduced new features to Gmail and updated Veo. We reimagined Chrome as an AI-first agentic browser through features like Chrome Autobrowse. We announced Project Genie, which lets users create and explore interactive worlds generated in real time using Genie 3, our general-purpose world model. We laid the groundwork for shopping in the AI era by introducing a new open standard for agentic commerce, the Universal Commerce Protocol, built alongside many retail industry leaders. Finally, from Android to Pixel, we are getting our best AI capabilities into people's hands. At CES, a range of partners, including Samsung, showcased how they are bringing Gemini to more devices, from XR to the living room and beyond. To confirm the rumors, we'll be introducing our Pixel 10a to our best-ever rated Pixel 10 series very soon.

Turning now to key highlights from the quarter, starting with Search. Search saw more usage in Q4 than ever before, as AI continues to drive an expansionary moment. We have executed with incredible speed. We shipped over 250 product launches within AI Mode and AI Overviews just last quarter. We have integrated Gemini 3 directly into AI Mode and Search. Now, Search can better understand your query, dive deeper on the web, and generate interactive UI experiences. And last week, we upgraded AI Overviews to Gemini 3, giving users a best-in-class AI response at the top of the search results page. We have also made the search experience more cohesive, ensuring the transition from an AI Overview to a conversation in AI Mode is completely seamless. These new experiences are proving to be more helpful and are driving greater usage.

A few highlights: first, once people start using these new experiences, they use them more. In the U.S., we saw daily AI Mode queries per user double since launch, and AI Overviews continue to perform very well. Second, people are engaging in longer, more complex sessions. Queries in AI Mode are three times longer than traditional searches. We are also seeing sessions become more conversational, with a significant portion of queries in AI Mode now leading to a follow-up question. Third, people are searching in new ways beyond text. Nearly one in six AI Mode queries are now non-text, using voice or images, and Circle to Search is now available on over 580 million Android devices. Next, Google Cloud. Our growth in revenue, operating margin, and backlog highlights the strength of our entire portfolio. One, we are winning more new customers faster.

We exited the year with double the new customer velocity compared to Q1. Two, we are also signing larger customer commitments. The number of deals in 2025, over $1 billion, surpassed the previous 3 years combined. And three, we continue to deepen our relationships with existing customers who are outpacing their initial commitments by over 30%. Nearly 75% of Google Cloud customers have used our vertically optimized AI, from chips to models to AI platforms and enterprise AI agents, which offer superior performance, quality, security, and cost efficiency. These AI customers use 1.8 times as many products as those who do not, enabling us to diversify our product portfolio, deepen customer relationships, and accelerate revenue growth. Our product line has multiple monetization levers, spanning infrastructure, platform, and high-margin AI-powered products and services, with 14 product lines, each exceeding $1 billion in annual revenue.

We offer leading infrastructure for AI training and inference to our cloud customers, with the industry's widest variety of compute options, from our own seventh-generation Ironwood TPU to the latest NVIDIA GPUs. Our 10-year track record in building our own accelerators with expertise in chips, systems, networking, and software translates to leading power and performance efficiency for large-scale inference and training. Our cloud AI accelerators serve the leading frontier AI labs, capital markets firms like Citadel Securities, enterprises like Mercedes-Benz, and governments for high-performance computing applications. We also offer our leading generative AI models, including Gemini, Imagen, Veo, Chirp, and Lyria, to cloud customers. In December alone, nearly 350 customers each processed more than 100 billion tokens. In Q4, revenue from products built on our generative AI models grew nearly 400% year-over-year, significantly accelerating from the prior quarter.

Today, more than 120,000 enterprises use Gemini, including AI unicorns like Lovable and OpenEvidence, and global enterprises like Airbus and Honeywell. 95% of the top 20 and over 80% of the top 100 SaaS companies use Gemini, including Salesforce and Shopify. Gemini is becoming the AI engine for the world's most successful software companies. Leading enterprises are also driving strong demand for our enterprise AI agents. We have sold more than eight million paid seats of Gemini Enterprise, our enterprise AI platform, to more than 2,800 companies, including BNY and Virgin Voyages, to streamline knowledge management and automate processes. Gemini Enterprise managed over five billion customer interactions in Q4, growing 65% year-over-year for customers, including Wendy's, Kroger, and Woolworths Group.

Our integration of Gemini in Google Workspace is driving wins with global brands like Schwarz Group and public sector organizations like the U.S. Department of Transportation. We are also seeing momentum with independent software vendors. Revenue from AI solutions built by our partners increased nearly 300% year-over-year, and commitments from our top 15 software partners grew more than 16x year-over-year. Before moving on, I'm pleased that we are collaborating with Apple as their preferred cloud provider, and to develop the next generation of Apple foundation models based on Gemini technology. Up next, YouTube. I want to highlight four points. First, streaming. In the living room, YouTube continues to be the number one streamer in the U.S. for nearly three years, according to Nielsen. From the NFL to Coachella, YouTube is where people watch today's biggest popular culture moments unfold. Second, subscriptions.

We continue to see strong subscription revenue growth across YouTube, particularly YouTube Music Premium. We'll soon launch new YouTube TV plans, bringing more choice and flexibility to subscribers with over 10 genre-specific packages. And the NFL has seen strong NFL Sunday Ticket subscriber growth with YouTube, with the highest paid subscriber number ever in the history of the product. Third, podcasts. To illustrate YouTube's popularity, in October 2025, viewers watched over 700 million hours of podcasts on living room devices, up 75% from just a year prior. And fourth, AI is transforming the YouTube experience for both creators and viewers. On average, every day in December, over 1 million channels used our new AI creation tools to supercharge their creativity. During that same month, more than 20 million viewers used our new Ask tool, powered by Gemini, to learn more about the content they watched.

Thanks, Sundar, and hello, everyone. I'll cover performance for Google Services for the quarter, then structure the rest of my remarks around the great progress we're delivering across Search, YouTube, and partnerships. Google Services revenues were $96 billion for the quarter, up 14% year-over-year, primarily driven by accelerated growth in Search. Adding some further color to our results, the 17% increase in Search and Other was led by broad strength across all major verticals, with retail particularly strong. On YouTube, the 9% growth in advertising revenues was driven by direct response. Network advertising revenues were down 2% year-over-year this quarter. Starting with Search and Other revenues, which delivered over $63 billion in revenue for the quarter. Sundar mentioned the expansionary moment for Search. The same is true for Ads. We're investing in AI to drive significant improvements across all areas of marketing.

We're expanding the entire playing field that advertisers can compete on. AI gives businesses the ability to reach more customers in more places than ever before. Gemini uniquely positions us to bring the transformational benefits of AI to ads in three critical areas for our customers: ads quality, advertiser tools, and new AI user experiences. First, ads quality. We've been deploying Gemini models to improve query understanding at a rate of almost a launch per month for the last two years. These improvements drive better query matching, ranking, and quality, making search ads even more effective. With Gemini across our ads quality stack, we evaluate relevance with greater accuracy than with previous generations of models. This has significantly improved our ability to systematically deliver more helpful, high-quality ads, contributing to a meaningful reduction in irrelevant ads served.

Gemini's understanding of intent has increased our ability to deliver ads on longer, more complex searches that were previously challenging to monetize. Gemini models also have a significant impact on query understanding in non-English languages, expanding opportunities for businesses to scale globally. Second, we're building more agentic actions into our advertiser tools. Businesses can now leverage Gemini in conversational experiences within Ads and Analytics Advisor to identify and run recommended actions, such as generating new campaigns. Advertisers use Gemini as a real-time partner to assemble creatives. In Q4 alone, they used Gemini to create nearly 70 million creative assets via text customization in AI Max and PMax. For instance, Aritzia, Canada's premier fashion house, used AI Max to find new high-value customers that traditional strategies miss, delivering an 80% incremental uplift in conversion value for Q4.

L'Oréal, one of the first alpha testers, used AI Max in 2025 across 800 unique campaigns in 23 countries and 30 brands. AI Max enabled the L'Oréal Group to maximize its presence across the full consumer journey, fuel its consumer growth, and increase revenue for DTC brands like NYX by 23%. The third area is how we monetize new AI user experiences in Search. We have significantly increased our focus on AI Mode and are in the early stages of experimenting with AI Mode monetization, like testing ads below the AI response, with more underway. For example, we announced Direct Offers, a new Google Ads pilot, which will allow advertisers to show exclusive offers for shoppers who are ready to buy directly in AI Mode. This new type of sponsored content uses AI to match the right offer provided by the retailer to the right user.

As Sundar mentioned, we are building the era of agentic commerce and working with our partners to introduce the universal commerce protocol in our consumer products and across the web. We've received tremendous feedback from the industry. Soon, people can use a new checkout experience to buy directly in AI Mode and Gemini from select merchants. Turning now to YouTube, which remains the number one streamer in the U.S. for nearly three years, according to Nielsen. YouTube creators are providing an unmatched breadth of content. Our investment in AI innovation across creativity, viewing experience, and monetization continues to pay off. We're seeing strong traction in our subscription business, are innovating to meet consumers where they are. We added a new sports tier for YouTube TV at a lower price point.

YouTube Premium Lite is proving to be a popular choice, and we continue to deliver strong year-on-year growth across YouTube subscriptions, particularly YouTube Music and Premium. Looking at monetization across YouTube, momentum continues in Shorts and the living room. Shorts now averages over 200 billion daily views, and as we've shared before, in a number of countries, Shorts earns more revenue per watch hour than traditional in-stream on YouTube, including the U.S. The retail vertical continues to grow, fueled by smaller advertisers increasingly adopting Demand Gen. Likewise, direct response continues to benefit from the momentum we're seeing with small and medium-sized advertisers. Viewers trust product and brand recommendations from YouTube creators, and we're focused on making YouTube a premier shopping destination. Innovations like shoppable ad formats are improving advertiser return on investment.

During Cyber Five, advertisers piloted Shoppable Mastheads, a new interactive ad format, where viewers browse products and send links to their phones for an easy shopping experience. On brands, our Creator Partnership Hub makes it easier for brands to find creators and develop campaigns. This holiday season, brands like JCPenney, Old Navy, and Target worked with creators for their holiday campaigns. Mattel partnered with eight top YouTube creators to reach families during the peak holiday shopping season in a campaign that helped drive a 25% increase in search volume for Uno. As always, I 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.

I would start by joining Sundar in saying how pleased I am that we are collaborating with Apple as their preferred cloud provider, and to develop the next generation of Apple foundation models based on Gemini technology. We partnered with Reliance Jio to provide over 500 million consumers with an 18-month free trial of our Gemini suite of products and 2 TB of cloud storage. Reliance enterprise customers will also get access to Google Cloud's Gemini Enterprise and TPUs, bringing the best of Google AI to every employee and workflow. The Home Depot is applying Google AI across the board, from cloud tools to AI-powered ads and YouTube creator partnerships that connect with the next generation of doers. Their investments in PMax and YouTube creator partnerships have resulted in double-digit increase in ad clicks and visits.

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. Anat, over to you.

Thank you, Philipp. My comments will focus on year-over-year comparisons for the fourth 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 first quarter and full year 2026. 2025 was a strong year of innovation and execution for Alphabet. These efforts, combined with our investments in AI, drove meaningful results across the business. For the full year 2025, Alphabet consolidated revenues were $403 billion, up 15% on a reported and constant currency basis. Moving to Q4 performance, we delivered strong growth in the fourth quarter. Consolidated revenues reached $113.8 billion, up 18% or 17% in constant currency, and was driven by an acceleration in Search and Cloud revenues.

Turning to costs and expenses, we reported a $2.1 billion stock-based compensation charge due to an increase in Waymo's valuation related to the investment round, which was announced on Monday. The vast majority of the charge was reflected in R&D expenses. Total cost of revenue was $45.8 billion, up 13%. TAC was $16.6 billion, up 12%. Other cost of revenues was $29.2 billion, up 13%, with the increase primarily driven by depreciation associated with the deployment of our technical infrastructure, content acquisition costs, largely for YouTube, and other technical infrastructure operations costs. Total operating expenses were up 29% to $32.1 billion. R&D expense increased by 42%, driven by compensation and depreciation. The increase in compensation was due to the Waymo charge and investment in AI talent.

Sales and marketing expenses were up 12%, primarily driven by marketing investments to support the Gemini app and Search. And G&A expenses increased 21%, primarily due to a shift in timing of our charitable contributions. Operating income increased 16% to $35.9 billion, and operating margin was 31.6%. Both operating income and operating margin were negatively impacted by the $2.1 billion Waymo charge in the quarter. Other income and expenses was $3.2 billion, primarily due to unrealized gains in our non-marketable equity securities portfolio. Net income increased 30% to $34.5 billion, and earnings per share increased 31% to $2.82. We generated record operating cash flow of $52.4 billion in the fourth quarter and $164.7 billion for the full year.

This translated into $24.6 billion of free cash flow in the fourth quarter and $73.3 billion for the full year. We ended the quarter with $126.8 billion in cash and marketable securities and $46.5 billion in long-term debt. Turning to segment results, Google Services revenues increased 14% to $95.9 billion, reflecting strong growth in Search and subscriptions. Google Search and other advertising revenues increased by 17% to $63.1 billion, representing another strong quarter with continued growth across all major verticals, with the largest contribution from retail. YouTube advertising revenues increased 9% to $11.4 billion, driven by direct response advertising. Results were negatively affected from the lapping of the strong spend on U.S. election in the fourth quarter of 2024 that we've mentioned on previous earnings calls.

Network advertising revenues of $7.8 billion were down 2%. Subscription platforms and devices revenues increased 17% this quarter to $13.6 billion, due to strong growth in YouTube subscriptions, particularly YouTube Music and Premium, and growth in Google One, which benefited from increased demand for AI plans. Google Services operating income increased 22% to $40.1 billion, and operating margins was 41.9%. The Google Cloud segment delivered outstanding results in the fourth quarter as the business continued to benefit from strong demand for our enterprise AI products. Cloud revenue accelerated meaningfully and were up 48% to $17.7 billion. Revenues were driven by strong performance in GCP, which continued to grow at a rate that was much higher than Cloud's overall revenue growth rate.

As Sundar noted, we're driving performance through strong growth in the win rate of new customers, signing larger customer commitments, and increasing spend with existing customers. GCP's performance was driven by accelerating growth in enterprise AI products, which are generating $ billions in quarterly revenues. We had strong growth in both enterprise AI infrastructure, driven by deployment of TPUs and GPUs, and enterprise AI solutions, which benefited from demand for our industry-leading models, including Gemini 3. Core GCP was also a meaningful contributor to growth due to strong demand for infrastructure and other services, such as cybersecurity and data analytics. We also had double-digit growth in Workspace, driven by an increase in average revenue per seat and the number of seats.

Cloud operating income was $5.3 billion, more than doubling year-over-year, and operating margin increased from 17.5% in the fourth quarter of last year to 30.1%. Google Cloud's backlog increased 55% sequentially and more than doubled year-over-year, reaching $240 billion at the end of the fourth quarter. The increase in backlog was driven by strong demand for our Cloud products, led by our enterprise AI offerings from multiple customers. In Other Bets, revenues were $370 million, and operating loss was $3.6 billion, reflecting the $2.1 billion Waymo charge I mentioned earlier. We allocate resources in Other Bets to businesses like Waymo, where we see meaningful opportunities to create value.

Alphabet funded a significant portion of the $16 billion investment round that Waymo announced on Monday, which will allow the business to accelerate its global expansion. CapEx was $27.9 billion for the fourth quarter and $91.4 billion for the full year, in line with our expectation. 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 Q4, we returned capital to shareholders through $5.5 billion of share repurchase and $2.5 billion of dividend payments. Turning to our outlook, I would like to provide some commentaries on factors that will impact our business performance in the first quarter and full year 2026. First, in terms of revenues, we're pleased with the overall momentum of the business.

At current spot rates, we would expect to see an FX tailwind to our consolidated revenues in Q1. However, the volatility in exchange rates could affect the impact of FX on Q1 revenues. In Google Services, we expect growth to be driven by ongoing innovation in the user experience, as well as improved ROI for advertisers, keeping in mind the normal seasonal pattern for advertising revenue. In Google Cloud, we're seeing significant demand for our products and services, which we expect to continue to drive strong growth despite the tight supply environment we're operating in. Moving to investments. The investment we have been making in AI are already translating into strong performance across the business, as you've seen in our financial results. Our successful execution, coupled with strong performance, reinforces our conviction to make the investments required to further capitalize on the AI opportunity.

For the full year 2026, we expect CapEx to be in the range of $175 billion-$185 billion, with investments ramping over the course of the year. We're investing in AI compute capacity to support frontier model development by Google DeepMind, ongoing efforts to improve the user experience and drive higher advertiser ROI in Google services, significant cloud customer demand, as well as strategic investments in Other Bets. Keep in mind that the availability of supply, pricing of components, and timing of cash payments can cause some variability in the reported CapEx number.

In terms of expenses, as we've discussed on previous 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 expense and related data centers operations costs, such as energy. In 2025, depreciation increased by nearly $6 billion, or 38%, from $15.3 billion in 2024 to $21.1 billion in 2025. Given the increase in our CapEx investments in recent years, we expect the growth rate in 2026 depreciation to accelerate in Q1 and meaningfully increase for the full year. We're also planning to continue hiring in key investment areas such as AI and Cloud. In 2025, our teams delivered amazing innovation, executing with a high level of discipline and velocity.

These efforts provided great experiences for consumers and outstanding performance for creators, partners, and enterprise customers, driving strong revenue growth. I want to take this opportunity to thank our employees for their contribution to this impressive performance. Now, Sundar, Philipp, and I will take your questions.