Moo Live 直播了視頻 · 2025/10/29 16:31

Alphabet Q3 2025 earnings conference call

Key Takeaways (AI-Generated)

Financial Performance

- Consolidated revenue reached $102.3 billion, up 16% year-over-year, marking first $100 billion quarter

- Google Services revenues grew 14% to $87.1 billion driven by search and YouTube

- Google Cloud revenue surged 34% to $15.2 billion with operating margin expanding to 23.7%

- Net income increased 33% to $35 billion with earnings per share up 35%

Business Highlights

- AI overviews now serve over 2 billion users with strong satisfaction metrics

- Gemini app reached 650 million monthly active users with 3X query growth

- Cloud backlog grew 46% quarter-over-quarter to $155 billion

- Waymo expanding to multiple cities including London and Tokyo plans

Financial Guidance

- CapEx expected to be $91-93 billion in 2025, up from previous $85 billion estimate

- Significant CapEx increase expected in 2026 with details on Q4 call

- Expect tight demand-supply environment for AI infrastructure through Q4 and 2026

- Q4 advertising may face headwinds from strong election spending comparison

Opportunities

- Waymo expanding to London, Tokyo, and multiple US cities for autonomous services

- Nearly half of code now AI-generated, driving productivity improvements across organization

- Partnership with PayPal for agentic commerce experiences enhancing market reach

- Over 70% of existing Cloud customers now using AI products

Risks

- Tight demand-supply environment for AI infrastructure creating capacity constraints

- Higher technical infrastructure costs including depreciation and energy expenses pressuring margins

Full Transcript (AI-Generated)

Operator

Referred to as 10K and 10Q 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 dot XYZ/ Investor. Our comments will be on year over year comparisons unless we state otherwise. And now I'll turn the call over to Sundar.

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've 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 of 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 the AI revenue as a key driver. Cloud backlog grew 46% quarter over quarter to $155 billion and 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 GPUs and we are the only company providing a wide range of both.

As we announced yesterday at NVIDIA GTC, we are now shipping the new a 4X Max instances powered by NVIDIA GB 300 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 1,000,000 Tpus next World class AI research including models and tooling.

Our models are world leading. Gemini 2.5 Pro, VO Genie 3 under viral sensation, Nano Banana are among the very best in class. Over 230 million videos have been generated with VO3 and more than 13 million developers have built with our generative models. We're looking forward to the release of Gemini Three later this year. Our research leadership is advancing next frontier technologies.

Last week we announced that a Willow quantum chip achieved a major breakthrough, running an algorithm 13,000 times faster than one of the world's best supercomputers. And the result is verifiable, paving the way to future practical applications. Speaking of quantum, let me congratulate Michel Devery, our chief scientist for quantum hardware. He received a noble in physics for early research he did in the 1980s. Three Nobles awarded to current Googlers in two years. Incredible.

And 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 and 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're our best reviewed devices ever, and 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're increasingly coming back to search more. Search and it's 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 AIO views in AI mode.

Let me dive into the momentum we are seeing. As we have shared before, AIO views Dr. meaningful query growth. This effect was even stronger in Q3 as users continue to learn that Google can answer more of their questions. And it's particularly encouraging to see the effect was more pronounced with younger people. We're also seeing that AI mode is resonating well with users in the US 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 75,000,000 daily active users and we shipped over 100 improvements to the product in Q3 and incredibly fast pace. Most importantly, AI mode is already driving incremental total query growth for search. Philip 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 2. 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, BB, Best Buy and Fair Price Group. As we scale, we are diversifying revenue. Today 13 product lines are each at an annual run rate over $1 billion and we are improving operating margin with highly differentiated products built with their 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, LGAI Research and Macquarie Bank, and it's why nine of the top ten AI labs choose Google Cloud. We are also the only cloud provider offering our own leading generative AI models, including Gemini, Imagine, VO, Chirp and Lyria.

Adoption is rapidly accelerating. In Q3, revenue from products built on our generative AI models grew more than two 100% 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 e-mail open rates by 17% and accelerated campaign localization by 10 times.

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 package 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 #1IN streaming watch time in the US 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 19,000,000 fans and set a new record for most concurrent viewers of a live stream on YouTube. YouTube Shots also continues to perform well in the US Shots now earn more revenue per watch hour than traditional in stream on YouTube.

But 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 generated video tools and more efficient editing to AI powered insights that help creators optimize their channels. We're also using AI to expand monetization, automatically identifying products to make their videos more shoppable. Philip will discuss in more detail.

And finally, Waymo. Next year, Waymo aims to open service in London and they're working to bring service to Tokyo. They've 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, and 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 Philip.

Philip

Thanks, Ondor, 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 and 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. It's 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 UAI 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 conversation in search, and we expand the try on capabilities to more clothing items now available to anyone in the US.

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 Airpod Search as 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, look to grow conversions while staying within their OS Golds. 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 Imogen Foreign Asset Studio and Product Studio, helping businesses produce more and better creatives. On the measurement front, we enriched the model supporting Meridian.

Our marketing mixed model with additional variables and more granular reporting in P Max is making bidding more effective. Financial services company Sofi has been using P Max to meet its ambitious growth targets and help 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 and 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 and helping us further monetize shopping related categories.

Looking at the living room, a 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. Sunda mentioned that we expanded our NFL partnership with our first ever exclusive global broadcast of an NFL. Game brands love the opportunity and we sold all our ad inventory within a couple of weeks.

Looking at creators A significant force behind the 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 VO3 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 and offerings such as YouTube Music and Premium and YouTube TV.

We're also playing 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. And 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 that transformation. Revolute, the global financial services company, leverages Google Clouds, Vertex AI platform and Gemini models to help power its advanced customer service chatbot, develop new hyper personalized financial products and offer predictive insights. Revolute is also increasing its presence on YouTube, adopting VO3 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. And of course, a huge thanks to all of you as we celebrate 25 years of Google Ads. Anat, over to you.

Anat

Thank you, Philip. My comments will focus on year over year comparisons for the third quarter unless they state otherwise. I will start with results at the Alphabet level and we'll 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 cost, largely for YouTube, fall by depreciation and other technical infrastructure operations cost.

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 and G and 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 base, offset by the legal charge and a significant increase in depreciation expense. Other income and expenses was $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 generate free cash flow of $24.5 billion in the third quarter. And $73.6 billion for the trail in 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 base 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 clouds. Overall revenue growth rate.

GC, PS 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 industry leading models including Gemini 2.5 core. GCP was also meaningful contributor to growth and 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 base, partially offset by higher technical infrastructure usage cost, 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 a billion for 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'll return 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 segments in Google services, year over year can. And advertising will be negatively impacted by the strong spend on US 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 the infrastructure including TP US and GP US 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, well, we have been working hard to increase capacity and have improved the pace of the 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 to 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 we'll 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 and 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 plus quarter. Now Sundar, Phillip and I will now take your questions.

Operator

Thank you. As a reminder, to ask a question, you will need to press *1 on your telephone to prevent any background noise. We ask that you please move your line once your question has been stated. Our first question comes from Brian Nowak with Morgan Stanley. Your line is now open.

Brian Nowak

Great. Thanks for taking my questions everyone. The first one maybe for for Philip or or Sundar, it's on agentic e-commerce and agentic travel. There's a lot of external Wall Street discussion about agentic e-commerce potentially monetizing at a lower rate than search. So the, the question is, what what factors are you most focused on to sort of ensure a smooth transition for your search business and for your advertisers as you move over to a more agentic world?

And the second one, Sundar is on Waymo. How far are we from an integration of Waymo into more of the, the core Gemini capabilities and the users in the platform? You're taking your, your user data of where I'm going, what hotel I'm staying at, what airport I'm staying at and have me integrate that into Waymo. You can actually have users use their profiles to pre schedule Waymo's. How, how far off is that? What do we have to do?

Philip

Hello, Brian, great question. This is all early, but we see agentic experiences really as additive to the way people seek information. It helps us answers people's tough questions. It helps us. It helps people get stuff done and it helps businesses in the process. And we're working on multiple agentic experiences across key verticals such as travel, commerce, shopping, and so on. And we're paying a lot of attention to creating a seamless user experience, but also to the fact that we need to integrate different partner ecosystems in a way that creates value for them.

And by the way, we're also working closely with a lot of our partners on the other side throughout cloud services to improve their own agentic experiences. And so maybe we go a little deeper on the shopping side, where we actually use AI already very actively to improve the shopping experience. As you know, we launched a more visual experience on AI mode, and that gives people a much more intuitive, conversational way to shop.

You can simply describe what you're looking for now, like the way you would talk to a friend, and we'll show you the visual. Shopping results and then we think about building an agentic shopping future and it has to be 1 again that benefits both users and merchants here. And you know that AIO, we also introduced new agentic checkout which will let shoppers use like agentic AI to buy products from merchant sites and so on. We have a partnership with PayPal to help merchants build agentic commerce experiences. We have a new open protocols for agent to agent transactions and so on and so on.

Sundar

And Brian on Waymo, great question. I was reflecting I think on the exact same topic. I'm scheduled to meet with the team to do a review on it in a few weeks out. Look, it is an exciting time. Waymo, clearly, you know is scaling up, particularly in 2026 and I think the possibility as you said of, you know, Gemini, particularly with the multimodal experience as well as services like YouTube, I think there's a real opportunity to make the in car experience dramatically better. Definitely something we are excited about and you'll see newer experiences in in 2026 for sure.

Brian Nowak

Great, thank you both.

Operator

Our next question comes from Doug Anuth with JP Morgan. Your line is now open.

Doug Anuth

Thanks for taking my questions. Philip, if you can just. Talk more about some of the drivers of the core search strength and I guess in particular, when you think about AI overviews and AI mode, we know that query growth is accelerating, but can you help us understand from there kind of what happens in terms of clicks per query and conversion rates and pricing in these AI driven search formats? And then Anat, can you talk about where you see opportunities in the core cost base as you look to make room to absorb the rapid growth in infrastructure and depreciation going forward? Thanks.

Philip

So let me give you a bit of vertical color first. In Q3, search and other revenues again delivered growth across all more major vertical. As we said it was from retail and financial services. Healthcare was also a contributor to the growth here. Our new AI experiences, you mentioned them overviews a mode continue to drive growth in overall queries including commercial queries, really creating more opportunities for monetization overviews of scaling up and working for our entire user base.

We're now over 2 billion users here and we're continuing to expand ads in a overviews in English to more countries across desktop, mobile and so on. And as I've shipped before for overviews, even at our current baseline of ads below and within the AI's response, overall, we see the monetization at approximately the same rate. So over time, we're excited about the opportunity of richer experiences in AI mode and AI overviews to basically open up then the opportunity for also much richer placements.

And I think as I've said on a prior call, we managed a business to drive great outcomes for our users and an attractive ROI for advertisers. We don't really manage to paid clicks and CPC targets, but as you will see in the 10 Q, paid clicks were up 7% year on year and CPC's were up 7% year on year.

Anat

Doug into your question around where else can we see more opportunity for efficiency and productivity. And I think you heard me say before, this is not a one time type of effort, but rather an ongoing way in which we manage the business. And the key here is that the more we drive productivity across our business, the more we can invest in the business for growth and obviously continue to drive improvement in the PNL.

Some of the areas are things that you've heard us talk about in the past, such as moderating the pace of headcount growth, optimizing a real estate footprint. But also as we invest more and more in our technical infrastructure, ensuring that we are optimizing that build out and the overall technical infrastructure we have, You know that a lot of the data Centers for example, that we we build ourselves. So they're optimized and we make sure we do them in the most efficient way.

Sundar mentioned in one of the previous calls the productivity associated with leveraging AI for Google. So it is the example the the percent of code now nearly half of all code generated by AI. That's a way for us to leverage AI to drive further productivity across the business. And obviously we always look at making sure that when we provide services or products that we get the right economics and the right value for what we provide.

So the one a good example is Shorts, which has a lower revenue share than in stream that it helps to improve some of our gross margins. So this is an effort we have ongoing. I've mentioned in the past that we have headwind with depreciation obviously increasing alongside our CapEx increase. So we're have we have efforts across the organization to ensure we we run the business in the most disciplined and productive way. We'll continue to invest for future growth.

Doug Anuth

Thank you both.

Operator

Our next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.

Eric Sheridan

Thank you so much for taking the questions. Maybe 2, if I could, Sundar, when you think about your custom silicon efforts across the organization, can you reflect a little bit about the opportunity set you see with each passing generation of custom silicon, both in terms of driving operating efficiencies inside the organization and potentially increased monetization efforts around those outside of the organization?

Second question would be for Phillip. Obviously, we can see the YouTube advertising revenue number in the reported results. Can you reflect a little bit about the scaling of the subscription side of YouTube offerings and how the two parts in in together maybe represent an interesting framework in thinking about the monetization side of YouTube increasingly being a mix of both ads and subscription? Thank you,

Sundar

Eric. Coral, I would say we are seeing, you know, substantial demand for our AI infrastructure products. Including TPU based and GPU based solutions, it is one of the key drivers of our growth over the past year. And I I think on a going forward basis, I think we continue to see very strong demand and we're investing to meet that. I do think a big part of what differentiates Google Cloud, you know, effectively we are the, you know, we've taken a full, deep, full stack approach to AI.

So we are and, and that really plays out right. We are the only hyperscaler who's really building offerings on our own models, you know, and, and we, we are also highly differentiated on our own technology. So to your question, I think that does you know give us the opportunity to continue driving growth and operating margins in cloud as we have done in the past. And and also I think from a revenue, you know sets the infrastructure portion of our business to be to be a growth driver looking ahead as well.

Philip

And to the second part of your question, look, just taking a quick step back, you know, we often describe YouTube's business as a flywheel. Obviously, it first all starts with the creators and we have significantly invested here to be the place that YouTube creators really call their home. That's a big piece of it, the number one piece viewers, of course, YouTube has billions of monthly logged in users and everyday people watch billions of hours of video.

And we talked about how our recommendation systems are driving robust watch time growth and so on and so on. So on the monetization side, YouTube's business is really part, I would say on a, let's call it a twin engine monetization strategy combining its advertising business and its growing subscription services. Both YouTube ads and subscriptions saw strong growth this quarter.

And so looking at YouTube Music and premium users are on average delivering more value to creators, to music media partners and YouTube itself than even ad supported users do. So in other words, on average, a YouTube Music and premium subscriber generates a meaningful high gross profit. And then they were simply an ad supported users and fans come from all over the world. You know this.

And this engagement through ads and subscription generates YouTube's revenues and funds what I started with these creators here. And this then drives more viewership and engagement and so on. And that's the flywheel. And so our priority continues like this growth cycle. We're happy with this twin engine monetization strategy.

Operator

Our next question comes from Mark Schmalik with Bernstein. Your line is now open.

Mark Schmalik

Yes, thanks for taking the questions. Sundar, you know, with the strong adoption of Gemini AI mode and overviews across the user base, are there any meaningful differences to call out kind of around the behavior and depth of engagement for those users across the entire Google ecosystem? And then Philip, I know we kind of asked this, you know, most quarters, but I'm, I'm curious kind of with some of the adoption you've seen around AI overviews and mode, you know how you see the economics of search evolving with the higher commercial and total query volume and how it kind of compares against the incremental cost to deliver these results. Thank you,

Sundar

Mark. Look, I think obviously AIO views are a natural part of a Google experience. And so, you know, engagement is very, very high. I would say AI mode you, you have a varied cohorts. There are people who are casual users who are checking it out. And then but there's a core group which, which really likes AI mode and is passionate about it. And so you see the early adopters, you know the product is resonating very strongly and they're seeking it out.

So I think, I think that's how I would highlight the difference with Gemini again, you know sort of engaged user base who who are seeking out the product and and so on. But across the board I think you know, the trajectory has been we are we are definitely seeing in each of those use cases a set of early adopters and then more people coming in and the people who are using it continue to use it more over time and report high user satisfaction. So I would say the underlying product metrics now are, are pretty encouraging to see as well.

Philip

Look into the second part of your question. I think we covered before Sonar, covered the quarry development. And as I've just said before for the AI overviews, even at our current baseline of ads, right, whether above, below and within the AI response overall, we see the monetization at approximately the same rate. And this is a great best baseline for further innovation. We talked about this, we're excited about where this can go.

And on the AI mode side, we're testing ads in AI mode and we'll continue to test and learn before we expand this any further. So there's in combination with what we mentioned about the commercial query overall development, I think we're in a, we're in a good place here. You could also argue that on queries that historically have not been well monetized, we think there's a potential opportunity here where you can obviously imagine that we can build this out with smart AI integration.

Operator

Our next question comes from Michael Nathanson with Moffett. Nathanson, your line is now open.

Michael Nathanson

Thanks. I assume one for one for not Philip, it's clear that when people use AI mode, the query lamp is much longer. But you talk about how that longer length may be impacting your abilities, your drive bro as and what you're seeing in terms of the early the benefits of maybe longer query lamp and then or not you came the alphabet from a pharmaceutical company. You've been there more than a year. You talk a bit about how you're working to look at ROIC internally and what early signs are you seeing that gives you confidence that this spending is, you know, is really driving better returns longer term? Thanks.

Philip

Look, as Sundar shared AM mode now has over like 75,000,000 daily active users in the US and we see strong and consistent, we grow regrowth in usage since launch and the queries doubled over the quarter. And as I also mentioned, we're testing ads in AI mode. We'll continue to less test before we expand any further. It's really too early to tell and go into any of the details of that testing.

Anat

Yes, and the the question related to ROIC and how we look at just overall our business and where do we see early signs, they're encouraging. So first I would say it's not just early signs because we're seeing returns obviously in the cloud business. You've heard us talk about the fact that we already are generating billions of dollars from AI in the quarter. But then across the board, we have a rigorous framework and approach by which we evaluate these long term investments that are meant to do 2 things.

One is to ensure we have we build a resilient growth profile for the company, but also that we meet the demand of the customers that we have here in the in the more near and mid term. So we look at it across the business. We evaluate the potential return for each one of them, whether it's in cloud and I think that's more visible obviously externally given that you see the the revenue generated and the fact that we're unable to meet at this point customer demand, We have more demand than we have supplied in our ads business.

You see the, the fact that we're investing to transform search as you heard from Philip and Serndo with AIO in a mode. So we're and excited to see what, what our investments are, help other investors are helping advertisers as well YouTube where it's helping power recommendations. So we're when we make a decision on investment in the long term, we go through a very rigorous process of assessing what the return could be and over what time frame we will see that return to give us the high level of confidence to then invest and make those investments for for the long term. So it's a, it's a very rigorous approach.

Michael Nathanson

Thanks.

Operator

Our next question comes from Ross Sandler with Barclays. Your line is now open.

Ross Sandler

Great. About 20% of Google's search queries are commercial historically. And you talked a bunch on this call about how AI overviews are kind of expanding the breadth of queries. Can you talk about how new products from the monetization side like AI Max are potentially increasing the percent of commercial queries? So

Philip

look AI. Max, and I mentioned this in my call before, improves the ability for advertisers to target a wider range of queries. Separately, there is the question of whether queries actually increase with AI mode. And I, Sundar actually talked about it and mentioned the opportunity that he sees here. So I think it's important to separate those two things. And I personally also see this, what I just said in my last remark, that I think over time there's an opportunity to actually take, let's say, queries that are not fully commercial, but could have an adjacent commercial relationship to basically expand this into more attractive ads offerings without while real creating a really interesting user experience at the same time.

Sundar

Yeah, and the only thing I would add is just stepping back broadly, I think AIO views and AI mode are, you know, dramatically improving search. We can see it in user satisfaction, user quality, all our metrics and they're universal in the nature they apply across the universality of human needs. So I think we're we're seeing it in breadth. And so, you know, naturally over time that'll apply to commercial categories as well.

Operator

Our next question comes from Ken Gorowski with Wells Fargo. Your line is now open.

Ken Gorowski

Thank you very much. 2 questions please. First, it appears more and more clear that all the new modes I googled you with Gemini overview, AI overviews, AI mode, even Chachi PT is growing the addressable market for engagement in search like behavior. If you talk about what gives you confidence that it will also grow the addressable market for marketing activity and overall revenue associated with that behavior? That's question one.

And question 2 is just more about as you think about AI mode, AI reviews and traditional Google search, how do you think, do you do you see a world in you know, 12 to 24 months? Those all exist and does the user, does the user eventually pick what, what, what mode they want is? Does the algorithm pick the, the mode? Can you talk a little bit about how, how you think that will progress over the next 12 to 24 months? Thank you very much,

Sundar

10. Thanks. Look, I think, you know, it's a dynamic moment and you know, I think we are meeting people in the moment with the with what they're trying to do. Obviously search is evolving and you know between AI overviews and AI mode, I think we are, if we are able to kind of give the range of experience for people in this moment over time you will expect us to, you can expect us. To make the experience is simpler in a way that just like.

We did universal search many, many years ago. We may have done text search, he made search, video search, etcetera. And then we kind of brought it together as universal search. So you will see evolutions like that. But I think, I think we, we want to be sensitive to making sure we're meeting the users, you know, in terms of what they are looking for. I think Gemini allows us to build a more personal, proactive, powerful AI assistant for that moment.

And, and I think, I think having the two surfaces search in Gemini allows us to really serve users across the breadth of their needs. And, but over time, we will, you know, thoughtfully look for opportunities to make the experience better for users. And to the first part, I would, I would broadly say, you know, as, as you know, I do think we've, we've been consistently saying for a while now this is an expansionary moment and, and, and we are seeing people engage more and, and I think when they do that naturally a portion of that information for users that those journeys are commercial in nature. So I would expect that to play out over time as well.

Operator

Our last question comes from Justin post with BAML. Your line is now open.

Justin Post

Great. Just a couple Sundar, I think you mentioned Gemini 3 is coming. Maybe you comment on the pace of innovation in frontier models. Is there still just a tremendous amount of innovation or or is it slowing at all? And then you mentioned, you know a number of large deals signed in the last nine months for cloud, which is great. Any, any changes in the economics of these deals as far as you know, long term profitability, anything we should be aware of? Thank you.

Sundar

Thanks Justin. The first on the on, on, on the on the pace of frontier model research and development. Look, I think you know two things about simultaneously true. I'm incredibly impressed by the pace at which the, the teams are executing and, and the pace at which we are improving these models. But it also is true at the same time that each of the prior model you're trying to get better over is now getting more and more capable.

So I think both the pace is increasing, but sometimes we are taking the time to put out a, a, you know, a notably improved, improved model. So I think and that may take slightly longer, but I, I do think the underlying pace is, is phenomenal to see and I'm excited about our Gemini 3.2 release later this year on, on cloud. You know, I would, I would point out as a sign of the momentum, I think the number of deals greater than $1 billion that we sign you know, in the 1st 3/4 of this year are greater than the two years prior.

So we are definitely seeing strong momentum and we are executing at pace. And in terms of long term economics, you know, I would say that again, us being a full stack AI player and the fact that we are developing highly differentiated products on our own technology, I think will help us, you know, drive a good trajectory here as you have seen over the past few years. Right,

Justin Post

thank you.

Operator

Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks.

Jim Friedland

Thanks everyone for joining us today. We look forward to speaking with you again on our fourth quarter 2025 call. Thank you and have a good evening.

Operator

Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.

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