Alphabet Inc. (GOOGL) Q3 2025 Earnings Call Transcript

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Overview

The earnings call reflects strong growth in AI-driven products, high demand for Google Cloud, and effective monetization strategies, particularly in YouTube and AI Overviews. Despite some caution due to increased expenses and lack of specific guidance, the overall sentiment remains positive with promising developments in AI and cloud sectors.

Key Financial Performance

Quarterly Revenue $102.3 billion, a 16% year-over-year increase or 15% in constant currency. Reasons for change: Strong momentum across Search, YouTube advertising, subscriptions, platforms and devices, and Google Cloud.

Google Services Revenue $87.1 billion, a 14% year-over-year increase. Reasons for change: Strength in Google Search, YouTube advertising, and subscriptions.

Google Search and Other Advertising Revenue $56.6 billion, a 15% year-over-year increase. Reasons for change: Growth across all major verticals, with the largest contributions from retail and financial services.

YouTube Advertising Revenue $10.3 billion, a 15% year-over-year increase. Reasons for change: Driven by direct response advertising, followed by brand.

Network Advertising Revenue $7.4 billion, a 3% year-over-year decrease. Reasons for change: Not explicitly mentioned.

Subscriptions, Platforms, and Devices Revenue $12.9 billion, a 21% year-over-year increase. Reasons for change: Very strong growth in both YouTube and Google One subscriptions.

Google Cloud Revenue $15.2 billion, a 34% year-over-year increase. Reasons for change: Strong performance in GCP, driven by enterprise AI products generating billions in quarterly revenue.

Google Cloud Backlog $155 billion, an 82% year-over-year increase. Reasons for change: Strong demand for enterprise AI.

Operating Income $31.2 billion, a 9% year-over-year increase. Reasons for change: Strong revenue growth and continued efficiencies in the expense base, offset by a legal charge and increased depreciation expense.

Operating Margin 30.5%, compared to 33.9% excluding the European Commission fine. Reasons for change: Impact of the EC fine and increased depreciation expense.

Net Income $35 billion, a 33% year-over-year increase. Reasons for change: Unrealized gains in nonmarketable equity securities portfolio.

Free Cash Flow $24.5 billion in Q3 and $73.6 billion for the trailing 12 months. Reasons for change: Strong operating cash flow and recent tax changes, partially offset by higher CapEx.

CapEx $24 billion in Q3. Reasons for change: Investments in technical infrastructure, with approximately 60% in servers and 40% in data centers and networking equipment.

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Operating Highlights

Gemini app: Achieved over 650 million monthly active users, with queries increasing 3x from Q2.

Pixel 10 series: Launched with Gemini Tensor G5 chip, receiving best reviews ever.

Android XR: Introduced as a new operating system for Samsung's Galaxy XR device, integrating Gemini.

Waymo expansion: Plans to launch services in London and Tokyo, and expand to Dallas, Nashville, Denver, and Seattle.

YouTube NFL partnership: Exclusive global broadcast live from Brazil drew over 19 million fans, setting a new record for concurrent viewers.

AI infrastructure: Scaling advanced chips, including NVIDIA GPUs and 7th-generation TPU Ironwood, to meet high demand.

Google Cloud: Achieved 34% revenue growth, with enterprise AI products driving billions in quarterly revenue.

YouTube Shorts: Now earns more revenue per watch hour than traditional in-stream YouTube.

AI Mode in Search: Rolled out globally in 40 languages, achieving over 75 million daily active users and driving incremental query growth.

AI Max in Search: Launched globally, unlocking billions of new queries and becoming the fastest-growing AI-powered search ads product.

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Risk or Challenges

Regulatory Challenges: The company faced a $3.5 billion fine from the European Commission, which impacted operating income and margin. This highlights ongoing regulatory scrutiny and potential financial risks from legal challenges.

Cloud Capacity Constraints: Despite strong demand for Google Cloud products, the company remains in a tight demand-supply environment for server deployments and data center construction, which could limit growth and customer satisfaction.

Increased Capital Expenditures: The company expects significant increases in capital expenditures, particularly in technical infrastructure, which could pressure cash flow and profitability in the short term.

Depreciation Costs: Depreciation expenses increased by 41% year-over-year, driven by investments in technical infrastructure. This trend is expected to accelerate, potentially impacting operating margins.

Advertising Revenue Volatility: Year-over-year comparisons in advertising revenue will be negatively impacted by the absence of U.S. election-related spending in Q4 2025, particularly on YouTube.

Energy Costs: Higher energy costs related to data center operations are putting pressure on the P&L, which could be exacerbated by increased infrastructure investments.

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Guidance & Outlook

AI Infrastructure: Investing in TPU capacity to meet demand, with plans to make the 7th-generation TPU, Ironwood, generally available soon. Scaling advanced chips in data centers, including NVIDIA GPUs and proprietary TPUs.

AI Research and Models: Looking forward to releasing Gemini 3 later this year. Advancing quantum technologies with breakthroughs like the Willow quantum chip, paving the way for future practical applications.

Search and AI Mode: AI Mode rolled out globally across 40 languages, with over 75 million daily active users. AI Overviews and AI Mode are driving incremental query growth, particularly among younger users. Plans to enhance AI Mode with more agentic capabilities.

Google Cloud: Cloud backlog grew 46% quarter-over-quarter to $155 billion. Strong demand for enterprise AI infrastructure and solutions, including Gemini 2.5. Plans to increase capacity to meet demand, with a tight demand-supply environment expected in Q4 and 2026. Cloud CapEx for 2025 expected to be $91-93 billion, with a significant increase in 2026.

YouTube: Expanding AI-powered features for creators, including tools for video generation and editing. Enhancing monetization with AI-driven shopping capabilities and personalized annotations. Strong growth in YouTube Music, Premium, and TV subscriptions.

Waymo: Plans to expand services to London and Tokyo in 2026, as well as U.S. cities like Dallas, Nashville, Denver, and Seattle. Autonomous testing scaling in New York City. Launching Waymo for Business and teen accounts.

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Shareholder Return Plan

Dividend Payments: In Q3, we returned capital to shareholders through repurchases of stock of $11.5 billion and dividend payments of $2.5 billion.

Stock Repurchases: In Q3, we returned capital to shareholders through repurchases of stock of $11.5 billion.

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Key Q&A

Q:What factors are you most focused on to ensure a smooth transition for your search business and advertisers as you move to a more agentic world?

A:Philipp Schindler explained that agentic experiences are seen as additive to how people seek information, helping answer tough questions and get things done. Google is working on multiple agentic experiences across key verticals like travel, commerce, and shopping, focusing on seamless user experiences and integrating partner ecosystems. AI is actively used to improve shopping experiences, including visual and conversational shopping, agentic checkout, and partnerships with PayPal for agentic commerce.

Q:How far are we from integrating Waymo into core Gemini capabilities and allowing users to pre-schedule Waymos using their profiles?

A:Sundar Pichai mentioned that Waymo is scaling up, particularly in 2026, and there is an opportunity to enhance in-car experiences with Gemini and services like YouTube. Newer experiences are expected in 2026.

Q:What are the drivers of core search strength, particularly with AI Overviews and AI Mode?

A:Philipp Schindler highlighted growth across major verticals like retail, financial services, and healthcare. AI Overviews and AI Mode are driving query growth, including commercial queries, and creating monetization opportunities. AI Overviews have scaled to over 2 billion users, and monetization rates are approximately the same as traditional ads. Paid clicks and CPCs were both up 7% year-on-year.

Q:Where do you see opportunities in the core cost base to absorb rapid growth in infrastructure and depreciation?

A:Anat Ashkenazi emphasized ongoing efforts to drive productivity, such as moderating headcount growth, optimizing real estate, and leveraging AI for productivity (e.g., nearly half of all code generated by AI). Efforts also include optimizing technical infrastructure and ensuring the right economics for services like Shorts, which has a lower revenue share than in-stream ads.

Q:What opportunities do you see with custom silicon efforts in terms of operating efficiencies and monetization?

A:Sundar Pichai noted substantial demand for AI infrastructure products, including TPU-based and GPU-based solutions, which are key growth drivers. Google Cloud's full-stack AI approach differentiates it, enabling growth in operating margins and revenue from infrastructure.

Q:Can you reflect on the scaling of YouTube's subscription side and its impact on monetization?

A:Philipp Schindler described YouTube's twin-engine monetization strategy, combining ads and subscriptions. Both saw strong growth, with YouTube Music and Premium subscribers generating higher gross profit than ad-supported users. This strategy supports creators and drives engagement, forming a growth flywheel.

Q:Are there meaningful differences in user behavior and engagement with AI Overviews and AI Mode?

A:Sundar Pichai noted high engagement with AI Overviews as part of the Google experience. AI Mode has varied cohorts, with early adopters showing strong engagement and satisfaction. Metrics indicate encouraging product performance.

Q:How do you see the economics of search evolving with higher commercial and total query volume in AI-driven formats?

A:Philipp Schindler stated that monetization rates for AI Overviews are approximately the same as traditional ads, providing a baseline for innovation. AI Mode is still in testing, and there is potential to monetize historically under-monetized queries with smart AI integration.

Q:How does longer query length in AI Mode impact ROAS and benefits?

A:Philipp Schindler mentioned that AI Mode has over 75 million daily active users in the U.S., with strong growth in usage and query doubling over the quarter. Ads in AI Mode are still being tested, so it's too early to detail impacts on ROAS.

Q:How are you evaluating ROIC internally, and what signs indicate better returns from spending?

A:Anat Ashkenazi explained a rigorous framework for evaluating long-term investments, focusing on resilient growth and meeting customer demand. Returns are visible in areas like Cloud and AI, with investments transforming search and powering recommendations. The process ensures confidence in long-term investments.

Q:How is AI Max increasing the percentage of commercial queries?

A:Philipp Schindler explained that AI Max improves advertisers' ability to target a wider range of queries. Over time, there is potential to expand non-commercial queries into commercial opportunities while maintaining a good user experience.

Q:Will AI Overviews, AI Mode, and traditional search coexist, and how will they evolve?

A:Sundar Pichai stated that these modes meet users' needs dynamically. Over time, experiences may be simplified, similar to the evolution of universal search. Gemini enables a more personal AI assistant, and the focus is on improving user experiences.

Q:What gives you confidence that AI-driven modes will grow the addressable market for marketing and revenue?

A:Sundar Pichai emphasized that AI Overviews and AI Mode are improving search and expanding engagement. As users engage more, a portion of their journeys will naturally be commercial, expanding the market for marketing and revenue.

Q:What is the pace of innovation in frontier models, and are there changes in cloud deal economics?

A:Sundar Pichai noted rapid innovation in frontier models, with Gemini 3.0 expected later this year. Cloud deals are seeing strong momentum, with more $1 billion+ deals signed in the first three quarters of this year than in the prior two years combined. Google's full-stack AI approach supports long-term economics.

Q:Review of Unclear Management Responses

A:Management avoided providing specific timelines or detailed metrics for several questions, such as the integration of Waymo with Gemini, the impact of longer query lengths on ROAS, and the testing outcomes of ads in AI Mode. Responses often emphasized ongoing efforts or future potential without concrete details.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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Alphabet Inc. (GOOGL) Q3 2025 Earnings Call Transcript

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The earnings call summary highlights strong financial performance, notable product developments, and strategic market expansions, such as the Gemini 2.5 launch and Waymo's expansion. The Q&A session reinforced positive sentiment with strong traction in AI and cloud services, despite some uncertainties in advertising revenue. The company's strategic investments and positive outlook on AI and cloud offerings suggest a favorable stock price movement. However, the lack of clear guidance on future ad revenue and evolving business models introduces some caution, resulting in a positive, rather than strong positive, sentiment rating.

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