Alphabet (GOOGL) Q3 FY26 Earnings Call Transcript

Unidentified speaker00:00

Flex it. When the chicken in your face going flex it. When they doubt on your face go.

Unidentified speaker00:22

Flex it

Unidentified speaker00:27

People are shocked when they find out that it's just the two of us

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we're a small scrappy business compared to the big guys

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In order to grow we have to multiply our capability

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Gemini and Google Workspace absolutely levels the playing field for small businesses like ours

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we're able to act like we're much bigger people think that we have a whole army of folks

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Payroll visuals marketing strategy emails playbooks

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With Gemini it feels like we have a multi million dollar team we show up as a big brand even though we're tiny

Unidentified speaker00:58

it's Sunday who's coming over

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Everyone

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For what game

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All of them

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Dave and Lizzie are from California we'll need the Niners and Chargers

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Check

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Kyle's mom's freaking out she needs every game for fantasy

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Check

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we're going to be the worst hosts ever

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we're good we got NFL Sunday ticket and YouTube TV

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NFL Sunday ticket and YouTube TV get every game every Sunday all in one place

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NFL with multi-view

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Check

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New users get NFL Sunday ticket for eight payments of $30 a month

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it's a new day it's a new life and I'm feeling good

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it's a new dawn it's a new day it's a new life and I'm feeling good

Unidentified speaker02:26

This public sculpture that I sketched seven years ago was dormant and the question became how are we actually going to fabricate this my work is rooted in research so I'm using Chrome to look at the process and I've got 200 tabs open and I don't want to close anything because it's one thing to dream it and then it's another thing to actually bring it to life

Unidentified speaker03:13

Yeah trendsetter whoa league of my own it don't get better no read what I wrote I'm a best seller yeah reach for my goals hit a dead center better bring a better bad because I'm bigger better solo single selling several shows at every single second Peter Piper pick a peck of pickled peppers Connor came and crushed the competition hope they get the message look always showing up last year's song still holding up see the name now and they know what's up price hit the top and it's going up I'm a trendsetter league of my own it don't get better no read what I wrote I'm a best seller yeah reach for my goals hit a dead center

Unidentified speaker03:28

You can be a fan your entire life and still ask what counts as a catch these days anyway two feet for the pros and one for the rest now that's a catch and what does this mean

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Look left throw right gotta hit the tight end

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And what was the first touchdown dance the high step old school that's the thing about being a fan man you can never know enough

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it's going down everywhere today buckle up Brad

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Florida time over to Jen a crafty player building her bag biz she opens Gemini takes a pick then asks to see the bag on some studio backgrounds that's how Boho Hobo goes pro Tom next we have Mister Beast

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Uh what's the game plan here

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Well first he takes a pick of the pool and asks how much slime he'll need to fill it up

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Gemini crunches the numbers and whoa take me to slime town

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Brad I'm just speechless

Unidentified speaker06:02

Well if both the bird and a logistical triumph

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Finally we have Nick yesterday he asked Gemini to let him know as soon as a good deal on a squat rack pops up

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that's a pro move Tom it's scanning everywhere

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Scanning Gemini doesn't quit oh it found one we got a deal here Tom

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Nick makes the snag for cheap

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he's saving his loot and blasting his glutes

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Working quads and saving wads

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I don't think we needed the double down there Tom

Unidentified speaker09:12

Oh my

Operator09:23

Welcome everyone. Thank you for standing by for the Alphabet third quarter 2026 earnings conference call. At this time all participants are in a listen only mode.

Operator09:42

After the speaker presentation there will be a question and answer session. To ask a question during the session you will need to press star one on your telephone. I would now like to hand the conference over to your speaker today Jim Friedland head of investor relations please go ahead.

Jim Friedland09:56

Thank you good afternoon everyone and welcome to Alphabet's third quarter 2026 earnings conference call with us today are Sundar Pichai Philip Schindler Thomas Kurian and Anat Ashkenazi. Now I'll quickly cover the safe harbor.

Jim Friedland10:09

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.

Jim Friedland10:24

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.

Jim Friedland10:38

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.

Jim Friedland10:45

Our comments will be on year over year comparisons unless we state otherwise. And now I'll turn the call over to Sundar.

Prepared remarks

Sundar Pichai11:00

Thanks Jim and hello everyone. Q3 was a strong quarter for Alphabet. Our deep full stack approach is driving momentum across the business with many opportunities ahead. Let me give you a quick snapshot of the quarter.

Sundar Pichai11:17

Alphabet revenues grew 25% year over year. We are now at a half a trillion dollar annual run rate that's remarkable growth. Search has strong momentum our AI investments are driving increased usage and overall query growth including commercial queries.

Sundar Pichai11:37

In fact our year over year query growth rate is the highest it's been in the last five years. Google Cloud revenues grew 103% our AI infrastructure and solutions are the major drivers for cloud growth and our customers see us as the leading provider here so those huge demand.

Sundar Pichai11:52

We are working hard to bring more capacity online to meet this long term demand. At the same time we are seeing strong demand for our TPU systems across a wide range of customers and we expect that to continue as we scale.

Sundar Pichai12:14

I'm excited to welcome Thomas to the call and he'll share more about cloud's momentum. On our AI models customers are using our models more than ever a first party model APIs are now processing nearly 32 billion tokens per minute 40% more than last quarter and more than four times what we processed a year ago.

Sundar Pichai12:27

And with Gemini 4 Argon and now Carbon which we announced today we are excited to be leading at the frontier. The Gemini app is now at 1 billion users and it's the fastest growing product in Google's history.

Sundar Pichai12:44

Lastly, we have surpassed 150 million YouTube music and premium subscribers globally including trials. Today I'll talk more about our AI progress, our global consumer platforms led by Search and YouTube then our long term bets.

Sundar Pichai13:03

Starting with AI highlighted by our Gemini 4 series of frontier models. We are seeing strong demand and usage for Argon which we launched two weeks ago. In fact on our developer platforms usage in the first week ramped up three and a half times faster than Gemini 3 even with capacity constraints.

Sundar Pichai13:24

Argon is proving to do really well in areas like finance, legal, cybersecurity and science. Developers and cloud customers are already using it for things like untangling legacy code bases accelerating scientific research robotics discovering product improvements and domain specific tasks requiring in-depth reasoning.

Sundar Pichai13:38

And at Google just in the last few weeks teams across Chrome Ads and Search have used Argon to write and optimize code much faster shipping 35% more code with 30% fewer errors.

Sundar Pichai13:49

Argon is just the start of the Gemini 4 series. Today we announced Carbon, it's our strongest frontier model with state of the art cybersecurity and long horizon capabilities.

Sundar Pichai14:07

It ranks number one on the recently updated artificial analysis intelligence index at 59. Carbon outperforms Argon across almost every domain like full stack web development, multimodal understanding, complex knowledge work, and scientific reasoning.

Sundar Pichai14:28

We are rolling carbon out first to a subset of trusted cyber defenders before we expand access and it's being tested by the US government. Beyond our Gemini 4 series yesterday we announced Genie 4 our most advanced world model yet that simulates safe realistic interactive worlds with native audio in real time.

Sundar Pichai14:41

This is an important building block for training robots and agents. This rapid progress underscores our incredible model momentum. we are at the point where AI is helping us increase our training and launch velocity.

Sundar Pichai14:57

I would expect the next 12 months to see continued acceleration because of RSI. We have more models coming soon including more efficient versions to help developers optimize for speed and cost and to deploy across our billions of users.

Sundar Pichai15:11

let's turn to search which is bringing the benefits of AI to more people than any other product in the world. Just like our shift to mobile over a decade ago we are focused on building the best search user experience followed by monetization.

Sundar Pichai15:23

We are building one seamless experience across AI overviews, AI mode and traditional search. and people are using our AI features more searching in entirely new ways.

Sundar Pichai15:38

Their queries are longer personalized and multimodal. Queries in AI mode are on average three times longer than traditional searches and one in five AI mode searches globally use voice images or documents.

Sundar Pichai15:52

We have now crossed over 50 billion visual searches per month one area I'm excited about is helping people get things done. be it booking reservations, filling in forms, scheduling appointments, or making purchases.

Sundar Pichai16:09

As AI becomes more personal and starts taking action for people and businesses, trust and security matter more than ever. People already put their trust in Google to get things done in their daily lives and our leadership here remains an important differentiator.

Sundar Pichai16:27

We focus first on getting these agentic experiences right with the Gemini agent for enterprise because the bar for security safety and governance is extremely high. As a next step we are bringing these features to search and also of course to our billion users on the Gemini app.

Sundar Pichai16:35

People are already using the Gemini app to do more than ask questions. They're using it to do things including complex multi-step agentic queries.

Sundar Pichai16:56

Our Gemini 4 series has been a really big step forward here and has already been handling these complex tasks really well. Agents will operate as a unifying layer across our products so you will see us extend these agentic experiences beyond search and the Gemini app to Chrome Android and our workspace products as well.

Sundar Pichai17:13

On to YouTube which continues to lead in the living room as the number one streaming platform in the US in terms of watch time. It's also seeing good subscriber growth as I mentioned. At Made on YouTube YouTube last month we announced more than 30 30 products and features for creators and viewers.

Sundar Pichai17:43

One great example is custom feeds where you can simply pick a topic you love and get a tailored video home feed based on that topic. Philip will say more on YouTube. On to our long term bets. Waymo is on a great trajectory we have now driven more than 300 million fully autonomous miles Waymo now operates in 15 major US cities and just recently opened up service to the public in San Antonio San Diego and Tampa with planned expansions into Canada, Germany, Singapore and Spain.

Sundar Pichai18:01

We're also seeing strong progress across our other long term initiatives. Isomorphic is using Argon to support drug design research, we demonstrated Magic State cultivation for the first time in quantum computing and launched our TPUs into space with Project Suncatcher.

Sundar Pichai18:10

So it's been a busy quarter and there's much more to come. I want to thank our employees for their work this quarter and over to you, Philip.

Philipp Schindler18:38

Thanks Sundar and hello everyone. I'll highlight our momentum across search YouTube and partnerships We continue to accelerate the deployment of Gemini models across our entire ads infrastructure to boost performance in the three areas I've highlighted before ads quality advertiser tools and AI user experiences first ads quality The integration of Gemini models into our ads infrastructure is improving how we decode user intent and drive ads relevance.

Philipp Schindler18:48

For example, in Q3 we made the biggest update to product listing ads in a decade adding new AI capabilities to help users make more confident purchase decisions.

Philipp Schindler18:54

Already we've seen satisfaction increase by 19% and dissatisfaction drop more than half.

Philipp Schindler19:20

We're also seeing AI models enable better prediction of clicks and conversions, stronger overall performance and deeper personalization of ads. For instance, through several innovations and personalization modeling, we delivered 18% incremental advertiser value and an 8% increase in user sentiment on Discover ads and 2026. Overall AI is accelerating our ads development and drives the majority of our product launches.

Philipp Schindler19:34

Second, advertiser tools. We're ensuring every advertiser from global brands to small businesses can seamlessly participate in our AI surfaces. AI Max and Performance Max continue to see strong adoption.

Philipp Schindler19:44

To give marketers even more control we're now introducing a way to test different budgets and ROI targets across multiple search campaigns in a single AI Max AB test.

Philipp Schindler20:00

To drive better performance we integrated our AI creative tools directly into AI Max in Q3 alone Gemini models helped advertisers generate over 1.5 billion campaign assets up over 7x year over year.

Philipp Schindler20:14

For example, by using AI Max to capture long form and multilingual queries, Telstra saw a 52% increase in conversions and a 36% reduction in cost per order showing up in key moments however the customers search.

Philipp Schindler20:30

Third, AI user experiences. Sundar mentioned the distinct behavioral changes we're seeing as users ask entirely new categories of questions. We think of search holistically a unified product spanning traditional results and AI powered search.

Philipp Schindler20:45

On AI mode many of these queries are upper funnel queries allowing us to capture new high value commercial intent. In addition the majority of AI AI mode queries are incremental. creating more monetization opportunities over time.

Philipp Schindler20:58

Additionally, our user research shows that people are comfortable with ads on these surfaces and find them highly relevant. Click-through rates are already similar between sponsored and organic product list items within AI mode.

Philipp Schindler21:20

Based on these collective results, we're now scaling high quality ads within AI overviews and AI mode to more users and queries. This includes taking our monetization footprint global for the first time Today we're announcing the expansion of ads in AI mode into international markets alongside multi-turn ads in AI mode in the US.

Philipp Schindler21:34

As always our approach is deliberate prioritizing the user experience and engagement first and then scaling the formats that drive proven RI for advertisers. That discipline is what gives us a strong durable foundation for the future.

Philipp Schindler21:49

As Sundar mentioned we're in the early stages of agentic experiences across our services and excited about the commercial opportunities ahead. The universal commerce protocol UCP is being rapidly adopted by retailers.

Philipp Schindler22:02

Today UCP enables direct checkout for hundreds of thousands of brands across Google including Chewy Nike Tapestry and many more. We're combining this with the Agent Payments Protocol as we build for the future of commerce.

Philipp Schindler22:13

Our focus spans two fronts unlocking agentic capabilities that act on behalf of the consumer and designing practical tools that give shoppers confidence and control.

Philipp Schindler22:27

We launched Universal Cart this quarter to support that second track mirroring how people actually shop today across Google. This allows retailers to maintain their relationships with customers while helping to capture sales and avoid abandoned carts.

Philipp Schindler22:49

Moving to YouTube. We view YouTube as a flywheel of creators, viewers, and advertisers. First, creators. Every day, more than 20 million videos are being uploaded. We are making creation easier with new generative AI tools in YouTube Studio plus a conversational editing assistant in Shorts and YouTube Create.

Philipp Schindler23:04

Looking at viewership, at Made on YouTube we introduced Short Series where creators can structure their Shorts into seasons and episodes. Sequential playback makes it seamless for viewers to discover new shorts and keep watching.

Philipp Schindler23:17

The third part is monetization starting with ads. Our focus remains on delivering value across the entire funnel. In Q3 Living Room accounted for over one third of total YouTube ads revenues.

Philipp Schindler23:30

Small and medium advertisers continue to adopt demand gen driving direct response. On YouTube Wayfair's demand gen campaigns drove a 2.3 times higher return on ad spend compared with traditional video reach campaigns.

Philipp Schindler23:45

Our YouTube creator partnerships program connects brands with over 3 million creators to drive highly effective campaigns. Brands like Lexus continue to partner with creators like Colin and Samir driving 11% lift in brand consideration.

Philipp Schindler23:56

More than 1.3 million channels are enrolled in YouTube shopping globally. Building on this momentum we recently announced that Amazon is joining YouTube Shopping.

Philipp Schindler24:09

US creators can now tag Amazon products directly in their videos shorts and live streams driving direct conversions. Importantly our subscription ecosystem continues to complement our advertising business.

Philipp Schindler24:32

Subscriptions continue to grow faster than ads led by YouTube Music Premium. YouTube Premium has more than 150 million subscribers with Premium and Premium Lite viewers have choice as more people opt into premium experiences it's a win for viewers creators and our business subscriptions help fund the creator ecosystem and drive the platform forward.

Philipp Schindler24:53

Finally strategic partnerships. Businesses are choosing Google because we bring together cloud, AI, ads and consumer platforms to accelerate their transformation. We expanded our partnership with American Express to support the ongoing modernization of their contact centers and collaborate on agentic commerce across search and wallet.

Philipp Schindler25:12

And Unity signed an expanded multi-year cloud deal to use our full AI stack to power the next generation game engine. Our commercial priorities are clear, expanding advertiser ROI, systematically advancing our AI monetization efficiency and scaling our ecosystem partnerships to support the next era of discovery.

Philipp Schindler25:22

In closing I want to thank Googlers everywhere for the incredible execution and our customers and partners for their continued trust. Thomas over to you.

Thomas Kurian26:02

Our strong momentum is driven by our integrated AI portfolio of chips, models, data security and agent platforms. all designed to work together we have strong diversification across our product lines industries and customers Google Cloud now has 18 product lines with more than 1 billion dollars each in annual revenue and our growth this quarter was driven by strong growth in Google Cloud platform with strength in both AI and core GCP.

Thomas Kurian26:22

TPU system sales were also a meaningful contributor. Over the past 12 months more than 2600 customers have used at least 100 billion tokens and nearly 75 at least 10 trillion tokens on Gemini Enterprise.

Thomas Kurian26:38

Nearly 90% of the Fortune 100 use Gemini Enterprise and customers who use Gemini Enterprise in Q3 2025 more than quadruple their spend with us year over year.

Thomas Kurian26:54

One of the important ways in which customers are using Gemini is for knowledge work. Across all our AI services we have sold more than 100 million seats for knowledge work.

Thomas Kurian27:25

Gemini Enterprise now includes the Gemini agent that that is deeply integrated across our entire cloud portfolio it can research and answer questions write and run code and automate process flows with one agent one API and a single prompt window it gives companies strong security and cost controls and the widest choice of frontier models.

Thomas Kurian27:56

Customers include BNP Paribas who is deploying Gemini Enterprise to more than 65,000 employees to streamline workflows while maintaining strict enterprise grade security and data governance, Tata Steel who deployed more than 300 specialized AI agents in just nine months to enhance manufacturing safety optimize supply chains and cut service times for customers by 50%.

Thomas Kurian28:09

Alta Beauty who built the Alta AI shopping assistant resulting in a 3x higher conversion rate than traditional browsing on their site.

Thomas Kurian28:17

Gemini is also driving acceleration for our database analytics and cybersecurity products.

Thomas Kurian28:40

Gemini can now help users find analyze and visualize information from structured and unstructured data. Gemini uses our knowledge catalog to find the right sources and definitions of information improving accuracy lowering token cost and making responses more reliable.

Thomas Kurian29:02

Gemini uses our lake house to access information from multiple systems with zero copy. to respond to agentic analysis BigQuery improved query speed over 40% year over year while reducing query processing cost by over 50% year over year.

Thomas Kurian29:17

Customers include Deutsche Deutsche Telecom which uses BigQuery cloud storage and knowledge catalog to build a unified data lake house across 40 plus legacy on-premise systems.

Thomas Kurian29:40

Etsy which migrated three petabytes of data to unified lake house. By using BigQuery and Iceberg they now perform critical data joins up to 60% faster. The growing risk of cybersecurity threats is also driving strong demand for our AI powered security platform.

Thomas Kurian29:56

Our Gemini Flash Cyber models are frontier models that automate vulnerability discovery across 20 programming languages and patch 2.6 times more reliably than other models.

Thomas Kurian30:25

And there's even better performance to come as we roll out Argon and Carbon. Our security platform integrates threat intelligence cyber response prioritization automated scanning code remediation and monitoring Gemini in Google Threat Threat Intelligence autonomously analyzes millions of external events every day with 98% accuracy.

Thomas Kurian30:33

And more than 95% of Wiz customers are adopting AI powered features and growth continues.

Thomas Kurian30:46

These security tools protect critical infrastructure including financial institutions like Banorte and Jack Hendry and telecommunication providers such as AT&T.

Thomas Kurian31:05

All of this is powered by our leading AI infrastructure spanning our TPU systems Axion CPUs the latest NVIDIA GPUs and our Agent Compute Engine which is specifically designed for AI agents.

Thomas Kurian31:20

TPU systems are specialized systems built for AI combining hardware, compute storage and networking with systems components and optimized software for training and inference.

Thomas Kurian31:34

TPU 8T and 8i offer up to 2.7 times better training performance and 80% better inference price performance respectively.

Thomas Kurian31:59

Versus our previous generation of TPUs. To make it easy for developers to port workloads to TPUs we recently worked closely with Meta to deliver Torch TPU. which allows users to train serve and deploy PyTorch models on TPUs using the tools they're already familiar with and rely on.

Thomas Kurian32:47

Nearly 100 customers use TPUs TPUs today and we're seeing strong and growing demand from many others. In addition to our work with Anthropic both directly and via Broadcom and public reference customers like Apple who are scaling pre-training of their foundation models on the latest generation of TPUs we're also working with new frontier model companies including Mirandill and Physical Intelligence capital markets firms including Citadel Securities and Jump Trading universities like Caltech and public sector service providers including Cassava and Cirascale.

Thomas Kurian33:01

Given continued strong and accelerating demand we've recently entered into partnerships to deliver TPU systems with both Crux AI and Oracle with more in the works.

Thomas Kurian33:05

Over to you Anat.

Anat Ashkenazi33:17

Thank you Thomas. My comments will focus on year-over-year comparisons for the third quarter unless I state otherwise. I will start with the results at the alphabet level and will then cover our segment results.

Anat Ashkenazi33:30

I'll end with some commentary and our outlook for the fourth quarter and full year 2026. We had a strong third quarter, delivering our 13th consecutive quarter of double digit revenue growth.

Anat Ashkenazi33:38

Consolidated revenues were 127.6 billion dollars up 25% in both reported and constant currency.

Anat Ashkenazi33:49

Total cost of revenue was 51.4 billion dollar up 24%. TAC was 16.4 billion dollars up 10%.

Anat Ashkenazi34:07

Other cost of revenues was 35.1 billion dollars up 32% driven by hardware costs primarily related to the sales of TPU systems increased depreciation content acquisition costs and technical infrastructure operations costs.

Anat Ashkenazi34:13

Total operating expenses were up 20% to 35.6 billion dollars.

Anat Ashkenazi34:22

R&D expenses increased by 36% driven by compensation primarily for investment in AI talent as well as depreciation.

Anat Ashkenazi34:29

Sales and marketing expenses were up 22% due to investments in Gemini and compensation.

Anat Ashkenazi34:41

NG&A expenses decreased 17% primarily due to lapping of higher legal expenses that occurred in Q3 last year partially offset by current year legal charges.

Anat Ashkenazi35:01

Operating income increased 30% to 40.6 billion dollars and operating margin was 31.8%. Other income and expenses was negative 8.2 billion dollars due primarily to unrealized loss from our investment in SpaceX from a decline in its stock price in the third quarter.

Anat Ashkenazi35:18

Net income and earnings per share decreased due to the decline in OINE. We generated strong operating cash flow of 42.3 billion dollars in the third quarter and 179.6 billion dollars for the trailing 12 months.

Anat Ashkenazi35:33

Operating cash flow was negatively impacted by the build up of inventory for TPU system sales as well as a 5.2 billion dollar cash payment for a 2018 EC fine following the conclusion of the appeal process.

Anat Ashkenazi35:43

CapEx was 51.4 billion dollars in the third quarter with the vast majority of the spend in technical infrastructure to support our investments in AI.

Anat Ashkenazi35:55

Approximately 65% of our investments in technical infrastructure in Q3 was related to servers and networking equipment which generally have useful lives of six years.

Anat Ashkenazi36:03

The remaining 35% was for data centers which have useful lives of seven to 40 years.

Anat Ashkenazi36:09

We had negative free cash flow of 9.1 billion dollars in the third quarter driven by our investments in CapEx.

Anat Ashkenazi36:19

Free cash flow in the third quarter was also affected by the aforementioned inventory build to support TPU system sales and payment of the EC fine.

Anat Ashkenazi36:35

Free cash flow was 19.7 billion dollars for the trailing 12 months. We ended the quarter with 265.1 billion dollars in cash and marketable securities which includes 90.4 billion dollars of marketable equity securities.

Anat Ashkenazi36:40

Long term debt was 125.1 billion dollars.

Anat Ashkenazi37:11

We have also entered into multi-year agreements to secure capacity for technical infrastructure and inventory as well as leases and energy At the end of the third quarter we had future purchase commitments of 924 billion dollars and pre-commencement leases and other obligations of 152 billion dollars These dollar amounts reflect the maximum contractual obligations however a number of these agreements have variable pricing and volume flexibility which could result in lower spend.

Anat Ashkenazi37:21

And as mentioned in our press release our board of directors declared a quarterly cash dividend on our common stock of 22 cents per share which is payable in December.

Anat Ashkenazi37:33

Turning to segment results Google Services revenues increased 11% to 96.3 billion dollars reflecting strong growth in search and subscriptions.

Anat Ashkenazi37:39

Total advertising revenues were up 11% with growth across all major verticals.

Anat Ashkenazi38:00

As we stated in our outlook last quarter FX was a slight headwind on year over year growth rates and had a more significant impact on sequential basis. Google search and other advertising revenues increased by 12% to 63.3 billion dollars with retail driving the largest contribution followed by finance.

Anat Ashkenazi38:10

YouTube advertising revenues increased 9% to 11.2 billion dollars with brand driving the largest contribution and notable strength in living room.

Anat Ashkenazi38:32

Network advertising revenues of 7.5 billion dollars were up 1% Subscription platforms and devices revenues increased 11% this quarter to 14.3 billion dollars driven by strong growth in YouTube subscriptions particularly in YouTube Music and Premium and strong demand for AI plans in Google One.

Anat Ashkenazi38:48

Google Services operating income increased 17% to 39.2 billion dollars and operating margin was 40.7%. The Google Cloud segment delivered record growth in the third quarter.

Anat Ashkenazi39:01

Cloud revenues were up 103% to 30.7 billion dollars driven by strong growth in GCP with strength in AI including both AI infrastructure and AI solutions and core GCP.

Anat Ashkenazi39:05

TPU system sales were also a meaningful contributor.

Anat Ashkenazi39:15

GCP accounted for the vast majority of the revenue generated in Q3. The cloud revenue growth rate excluding the impact of TPU systems was again incredibly strong.

Anat Ashkenazi39:22

Cloud operating income was 11.1 billion dollars more than tripling year over year.

Anat Ashkenazi39:51

Operating margin increased from 23.7% in the third quarter last year to 36.2% the third party bridging capacity which we discussed on our prior call came online only at the very end of Q3 and therefore had limited negative impact to our margin in the quarter Google Cloud's backlog was 561 billion dollars in the third quarter with the majority of the backlog related to typical GCP contracts.

Anat Ashkenazi39:58

We expect to recognize just over 55% of the total backlog as revenues over the next 24 months.

Anat Ashkenazi40:11

In other bets, revenues were 372 million dollars and the operating loss was 2 billion dollars as we continue to expand Waymo's business and invest in key other bets.

Anat Ashkenazi40:19

In an alphabet level activities the operating loss was 7.7 billion dollars driven by shared AI R&D expenses.

Anat Ashkenazi41:13

I'll now turn to our outlook for the remainder of 2026. First in terms of revenues at current spot rates we would expect a slightly larger FX headwinds to our consolidated revenues in Q4 relative to the prior quarter this impact will be seen primarily in search and YouTube ads in Google services we will continue to lap the search performance acceleration that began in the third quarter last year which will pressure revenue growth in Q4 In Google Cloud, we expect TPU system sales to continue to scale in Q4 followed by a meaningful revenue ramp in 2027. With respect to cloud margins, given the supply constrained environment, we started utilizing third party compute capacity at the end of Q3 and will ramp usage in Q4. We expect margin headwinds in the near term as we utilize this capacity.

Anat Ashkenazi41:22

Moving to investments, our full year 2026 capex guidance range of 195 to 205 billion dollars remain unchanged.

Anat Ashkenazi41:30

We continue to expect our capex to increase significantly in 2027 and will provide further details on our Q4 call.

Anat Ashkenazi41:44

In terms of expenses, the significant increase in our investment in technical infrastructure will continue to weigh on the P&L in the form of higher depreciation expenses and related data centers operation costs such as energy.

Anat Ashkenazi42:27

Before we move to Q&A, let me say a few words on how we think about return on invested capital and free cash flow. We're in a unique position to be able to monetize our AI investments across many products that reach billions of users and enterprises our AI investments in search are driving our highest query growth in half a decade Google Cloud has generated tens of billions of dollars in AI revenues year to date and Google One is our fastest growing subscription products driven by demand for AI plans throughout this investment cycle we expect to generate an attractive ROIC that remains meaningfully above our cost of capital and anticipate generating strong cash flow from operations.

Anat Ashkenazi42:37

Our sizable investments in technical infrastructure and inventory build of TPU systems as we scale that business will put pressure on free cash flows.

Anat Ashkenazi42:53

Q3 was a strong quarter highlighted by our innovation and disciplined execution across all areas of the business including the launch of Gemini 4. I want to take this opportunity to thank our employees for their contributions to our performance.

Anat Ashkenazi42:57

We will now open the call for Q&A.

Questions and answers

Operator43:11

Thank you. As a reminder to ask a question you will need to press star one on your telephone. To prevent any background noise we ask that you please mute your line once your question has been stated.

Operator43:20

And our first question comes from Doug Anmuth with JPMorgan. your line is now open.

Doug Anmuth43:35

Thanks for taking the questions. One for Sundar and one for Philip. Sundar on a recent podcast you said that 2027 could be the golden age of productivity for Google because of the new class of models and how they'll integrate with your other products.

Doug Anmuth44:03

Was hoping you could elaborate on that and just share more how you think about the opportunity set there ahead and then Philip just on query growth the fastest in five years but obviously some deceleration in search growth can you just help us understand the disconnect there is it you know simply that you haven't been showing as many ads basically in AI overviews in AI mode and that's now becoming a bigger percentage of the overall queries thanks

Sundar Pichai45:07

Thanks, Doug. You know, we are definitely started seeing a step change you know, I would say with 3.8 flash internally as our models got better at long horizon tasks, agentic coding etc but you know definitely you know seeing a huge point of inflection once we've started deploying Argon internally it is one of the most meaningful internal productivity levers we have seen on software engineering directly tracking high quality code that's getting checked in the rate at which it's getting checked in you know reducing the number of rollbacks but more importantly people are tackling you know massive problems as well as you know we are beginning to see innovation on the product and the consumer experience side from deploying those models.

Sundar Pichai45:37

But all this happened only about four weeks ago we are now deploying Carbon internally and Carbon is a meaningful step up from Argon so so as we roll it out and make it all widely available to Googlers with more compute I expect to that's what I was referring to and I I'm even more excited since I said that in the podcast and what I would view as a golden year ahead in terms of us being able to be more productive and so excited for the innovation ahead Philip

Philipp Schindler46:18

Yeah Doug on the second part of your question look in Q3 search grew 12% year over year to 63 billion and when you look at the change in growth rate from Q2 to Q3 there were a few drivers here so first there was FX it was the single largest driver of search deceleration relative to Q2 second there were vertical specific dynamics in retail some of our APAC advertisers were impacted by the EU eliminating its de minimis exemption In media and entertainment, spend normalized after an unseasonably strong Q2 driven by the FIFA World Cup, which had more matches and therefore more advertising budgets allocated in June than actually in July.

Philipp Schindler46:42

It's also to the next part of your question it's worth noting that the strong growth in AI mode queries had an impact because of the lower monetization we're seeing in AI mode to be clear we feel very good about our trajectory here our ad experiments have shown promising results and we're now scaling ads within both AI overviews and AI mode to more users and more queries including as I mentioned international markets and multi-turn ads in the US.

Doug Anmuth46:46

Thank you.

Operator46:57

Our next question comes from the line of Brian Nowak with Morgan Stanley. Your line is now open.

Brian Nowak47:11

Thanks for taking my questions. I have two, maybe let me start with agentic. You know, you rolled out Spark to some of the users throughout the year. And Sundar, you've talked a lot about shipping more agentic products to the broader base of users.

Brian Nowak47:26

Can you just help us understand a little bit some of the key hurdles you have to overcome technologically to ship out agentic products to the full base of users? Is it model efficiency? Is it capacity? Is Is it the technologies are ready? Like what do we have to do technologically to do that?

Brian Nowak47:44

And then the second one just on to Doug's question on search Anat can you help us better understand the search performance comparison factor that you talked about impacting search and how do we think about that as we kind of go into 4Q, 1Q just kind of looking at the compares thanks

Sundar Pichai50:04

Thanks. Thanks, Brian. First of all, on agents, you know, what an exciting and dynamic area. Uh you know I think when I look at our new models and we see the capabilities of the kind of complex tasks they can take in an automated way and execute with very very high quality it's clear that the agentic capabilities we've all envisioned you know are going to be real and so I couldn't be more excited to bring the next generation agentic experiences to our users. To your question I would say few things I think the Gemini 4 model series has been important we are working on distilled versions of our carbon models so that we can deploy it across a billion users scale efficiently both from a compute from a latency standpoint and from a quality standpoint so that's been you know an important area of investment definitely making sure you need more than a capable model at scale you need a robust harness you need a highly secure runtime and this is where GCP comes in being able to give each and every one of our users a secure runtime with 24 7 availability in the cloud the right ecosystem of skills and connectors so all of that is the foundation we have been hard at work and we decided to roll it out to enterprise first which we announced with our Gemini agent for enterprise essentially because they have the highest bar for security governance and controls and it's been well received and we are in the process of expanding that later this year we will bring that same experience to consumers obviously starting with the 1 billion users in our Gemini app we already see people in the app moving beyond chat to what are task and agent like experiences and so you know the trust users have in our products the fact that all their context is right there I think sets us up well but we are really focused as a company on delivering that unified experience across our products and you should expect to see a lot of progress you know later this year.

Anat Ashkenazi50:59

Thanks, and on the second question with regards to my comments, I believe you're referring to the outlook with regards to search a couple of dynamics that I've mentioned one is on sequential related to impact of FX headwinds which we saw this quarter as well versus the previous quarter so where we are today with current spot rates we expect that this will be somewhat of a headwind to Q4 results and then when we look at the year over year comparisons this quarter we started lapping the acceleration we saw in search growth in 2025 the back end of 2025 we left about three points of growth versus Q3 and then we expect to see that continue in Q4 a couple points of lapping that growth acceleration that we saw at the end of 2025.

Brian Nowak51:02

Great. Thank you both.

Operator51:12

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

Eric Sheridan51:45

Thanks so much for taking the question. Based on some of the comments you've made recently Sundar on compute constraints can you refresh for us your key priorities for the application of compute as it becomes available across the organization and the second part maybe for you or Thomas would be within Google Cloud specifically how does your view continue to evolve with respect to the application of compute to cloud customer needs relative to external TPU thanks so much

Sundar Pichai52:19

Thanks thanks Eric I'll start and then Thomas will answer the second half you know definitely compute allocation is is as an area where we are spending a lot of time on because of the forward planning that's needed I would start with saying we feel fortunate to have an extraordinary set of opportunities ahead of us you know we are operating a scale consumer business that reaches billions of people a hyperscale cloud business with a lot of momentum and of course a range of other highly important areas across Google and Alphabet.

Sundar Pichai53:31

We always take a long range planning and so you know each of our business areas submit long range plans with a very disciplined ROIC framework and so you know I would broadly think of all of this as a long range planning process not a short term allocation exercise obviously our AI models underlie everything we do from search and YouTube to cloud to Waymo and so on so it's the foundation and we view viewed as a highly leveraged approach the full stack approach drives a lot of efficiency as well as gives us a lot of optionality across a wide variety of opportunities so obviously that is the foundation and we plan for that for the long term too and about that as I said we really look at our businesses and really take a disciplined long range planning approach you know to us obviously you know we are seeing very very robust demand signals across a wide variety of areas and so we view it as an extraordinary set of opportunities and we are investing for that moment Thomas

Thomas Kurian53:31

Eric on the

Thomas Kurian53:52

On the demand in cloud, we are always managing our portfolio to ensure we have a breadth of customers and we have different types of customers from digital natives AI labs, traditional enterprises, financial and capital markets customers. So it's a broad set of customers.

Thomas Kurian54:21

Many of them have either started with using TPU systems for example in our cloud uh we have over 100 significant TPU customers who start in our cloud they learn to use TPUs and remember TPU system is a combination of hardware, system software, compilers, the whole thing, assembled as a system including optical networking and other things.

Thomas Kurian54:40

We've taken a very deliberate approach on how we're bringing TPUs to customers. The first one is to build the right silicon. So we have 8T for training, 8I for inference. They both offer substantial price performance and performance improvements relative to prior generations.

Thomas Kurian54:54

Second, we've optimized the software the optimization in software is not just to make the systems run better and to give you great performance but also to see make portability seamless.

Thomas Kurian55:56

Recently we introduced for example PyTorch which opens up a much larger market for us by optimizing PyTorch on the TPU. Third we are broadening distribution. So in the past you could use TPUs in our cloud now we make for customers who want TPU systems in their data centers we're making TPU systems available in their data centers we're also broadening availability to other providers for example we announced a partnership with Oracle and we've launched along with Blackstone an agreement for Crux AI a joint venture to offer customers TPU systems we are seeing extraordinary demand and strong growth from both AI labs capital markets, financial services institutions and enterprises and if you imagine these 100 plus customers growing to many more and also scaling their use in into TPU systems we see strong demand over the future.

Operator56:10

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

Ross Sandler57:23

Uh thanks I wanted to stick with the TPU resale business topic that you just mentioned so Anat last quarter you kind of said that the revenue will be recognized on a system sales I believe so if a gigawatt of TPU full system costs around 35 billion for the compute and all the kind of components around it what percent of that are we actually recognizing as revenue and what kind of flow through does that have in terms of margin profile relative to where the Google Cloud segment currently sits and then I guess the second part of the question would be as you help companies like Anthropic bring on more of their own kind of first party infrastructure what does that mean for the capex intensity of Alphabet as you start to kind of hand off some of the future capex to the AI labs and may not require as much capex intensity you know on your own in your own data centers thoughts on that would be great thank you

Anat Ashkenazi59:00

Yeah, let me combine these two questions. First, obviously, we don't provide specific financials at the product level. But let me walk through how to think about the financials associated with the TPU system sales and obviously just as a reminder and Thomas can elaborate on that as well a TPU system is not just a chip but it's a specialized system that combines multiple things including hardware, compute, storage, networking, so we are selling much more than just a chip software training inference there's a significant added value that's being provided to the customer that's purchasing a TPU system and the way this works and this is linked to your second portion of the question when we sign an agreement with a customer to sell TPU systems once we sign that that agreement you'll first see that showing up in our backlog and then we start building inventory so think about this from a capex versus cash perspective we build the inventory ahead of getting the revenue stream in so I think I've alluded to this on the previous call you see inventory balances go up or previously inventory balances primarily were some of our hardware products now those TPU systems that are not yet sold will be showing up so you see cash going out and we're building up the inventory base and then as we start delivering and billing customers for these TPU systems then you see cash coming in.

Anat Ashkenazi59:34

So it's not the traditional kind of capex as you're thinking about this and I think that's the essence of your question. But rather a different cycle of cash flow generation. Now given that we are in the process of building up and ramping up that business you're seeing that cash needs in our cash flow statements and you see the those inventory build to date we've had some system sales recorded as revenue but expect more of it to come in through 2027.

Operator59:52

Our next question comes from the line of Justin Post with Bank of America your line is now open

Unidentified speaker1:00:30

Great, thank you. I have some questions on the agentic transition you know you did launch the universal shopping cart clearly people are liking and using agentic use cases as more in that more of that happens how do you plan to manage the search transition to agentic use do you think that could be a headwind and second do you think agentic could actually drive more monetization for your traffic over the long term and then I'll go again at TPU margins you know we're wondering do you think this is a really good business for you and maybe why if you can't give us the margins why you think this is a good way to use all this capacity thank you

Philipp Schindler1:01:27

we're in the early days of agentic but maybe directly to the second part of your question but we view agentic experiences as clearly additive our focus is build it building trusted secure super scale experiences that users love anchored frankly on agentic commerce foundational blocks like you mentioned universal commerce the cart the agents payments protocols and so on when users shop and that's important there's a part of the journey they don't like the grunt work which is frankly fantastic to automate with AI but we also want to enhance not just automate away the discovery experience that people frankly love in so many cases users like choice and they want to consider things way beyond price like brand loyalty customer service and so on so we're really architecting these agentic workflows in a way that we can intentionally design the time and the space for users to explore those choices.

Philipp Schindler1:01:40

So simple example, an agent could respond here's the insurance product we found and here's another strong option one of which is a higher premium maybe a lower deductible and they're currently offering a very special discount.

Philipp Schindler1:02:00

So given that there's almost never only one perfect option for a decision we're actually confident that we can actually provide really interesting compelling advertising models for agentic use cases and obviously you can imagine going beyond us with subscriptions and other payment methods but I'm really actually excited about the advertising opportunities in an agentic world

Philipp Schindler1:02:38

You know overall I would add and say look I would view it as a you know expansion opportunity right anytime just like a few years ago being able to incorporate AI chat use cases in search allowed people to ask more and do more in search which is what is playing out in our usage I think agents would again be an opportunity to expand the types of problems we solve for our users I think people always underestimate all the components you need to deliver these agentic these complex experiences for users.

Philipp Schindler1:03:05

And search on the surface looks simple but there's extraordinarily deep levels of investment and things we have built over time like Knowledge Graph being an example and so our understanding of the world etc so I think you know I'm excited about agents and I I would view it as a new frontier which brings in a new set of use cases to search and so we are excited to work through that.

Anat Ashkenazi1:03:22

On TPU systems and margins, we don't break out margins for individual products or infrastructure components. However, we see several benefits from designing and manufacturing TPU systems.

Anat Ashkenazi1:03:45

So first of all to remind you the TPU system is not just a chip but it's a complete system given the price performance benefits of TPU systems relative to competitors growing demand for accelerated compute and the scarcity of accelerated compute we're very focused on continuing to improve margins as we scale the business.

Thomas Kurian1:04:32

Two additional points first of all when Anat mentioned that we procure components to build inventory we only do that after we have signed contracts so all of the inventory that for TPU systems are associated with committed contracts additionally by putting TPU systems in third party facilities and in customer data centers it allows us one to broaden our addressable market some for some industries they have data in their premise that they cannot move to a cloud and it allows us to bring accelerated compute to where the data sets additionally it also offsets the need for us to have to pre-build facilities to host these TPU systems

Operator1:04:45

Our next question comes from the line of Mark Shmulik with Alliance Bernstein your line is now open

Mark Shmulik1:05:28

Uh yes thanks for taking the questions uh I'm going to be on the same couple topics but Philip just on agentic um you know as you've kind of just taken a look at some of the early more agentic style use cases on Gemini AI mode and kind of observing some of the 3p integrations with Google properties anything that surprised you or changed your view I know we've talked a lot about commerce but perhaps on like consumer productivity as well uh and then either Thomas or not just on kind of cloud growth is there anything you could share just around the rate of growth of Google Cloud excluding the TPU system sales and just how much of that's been kind of constrained by capacity and as some of that 3p capacity comes online in Q4 is it fair to kind of assume an acceleration of that Google Cloud business thank you

Sundar Pichai1:05:47

Look, you know, maybe I'll take the first part on what we are observing on these early agentic style use cases. We are definitely seeing it. Just recently in the Gemini app, we've added a task tab and where people are actually typing and agentic queries and so we can observe that.

Sundar Pichai1:06:23

Look, in all of this, users really want they want to be delighted so they effectively are you know looking for they have a high bar what encourages repeat use is is your ability to you know more handle these longer tasks and actually deliver a satisfactory outcome at the end you know just like having seen this in other areas including coding etc you know when you're doing it at 70% it looks like it doesn't work till you cross a certain threshold and it really takes off.

Sundar Pichai1:06:42

And so we are closely learning from all of it, you know, identifying gaps, laying all the foundations I talked about earlier and, you know, I'm confident it's an area where you will see a lot of progress across our surfaces you know, as we go through later this year in 27.

Unidentified speaker1:07:13

The one thing as we transition to TPUs, one of the comment I would make on the TPU systems is look in the semiconductor industry economies of scale matter. So I would look at our ability to do uh you know TPUs both for deploying in our data centers and TPU systems in others data centers as a ability to scale up the product which directly translates into better economics.

Anat Ashkenazi1:07:36

To address the question on the rate of growth of cloud you know our Google Cloud segment delivered record growth in the third quarter with cloud revenues up 103% to 30.7 billion the strongest growth contributor was Google Cloud Platform with strength in both AI and core GCP.

Anat Ashkenazi1:07:49

So GCP accounted for the vast majority of revenue generated in Q3 and cloud revenue growth excluding the impact of TPU system sales was again very, very strong.

Thomas Kurian1:08:58

Demand was also strong across our product lines. So we see three things going on one as people use Gemini we see revenue growth from Gemini itself but we also see that as people use Gemini it drives growth in other parts of our portfolio for instance as they build agents they use compute to perform a task and so they buy compute they use storage to store memories of the agent database to serve up what's called context for the agent to reason on and obviously given all the cybersecurity threats we are seeing strong growth in our cybersecurity portfolio so we are confident about our growth and the diversity in our growth we're also seeing new customers buy into GCP and accelerating growth in new customer adoption so we also see that as a growth vector for us and we're always at any point in time we could obviously serve a lot more demand with capacity but we are managing all of these parameters and growth carefully.

Operator1:09:13

And our last question comes from Michael Nathanson with MoffettNathanson your line is now open

Michael Nathanson1:10:02

Thanks I have two for Sundar in an earlier answer to Eric's question about TPU and cloud we heard a willingness to work with some of your competitors or companies that we may view as competitors in models and cloud I wonder how you think about the philosophy here about work with people that may be are competing with you and why the strategy is an opportunity not a risk longer term that makes sense and then secondly on agentic consumer behavior one of the debates is around safety and trust do you share with us what you've learned so far about safety and trust are those variables that matter to consumers and how do you think if those variables matter what are you doing to protect consumer trust and privacy as you build out agentic consumer tools thanks

Sundar Pichai1:10:20

Thanks, Michael. Great questions. On the first one, look, you know, we have long viewed what we build as, you know, categories of things which we build as products and then there are categories of things which we build as platforms, right? And you need to have a clear view on which is which.

Sundar Pichai1:12:39

And when you're building things as platforms, you really work hard to make the platform great and make sure it works for everyone. We have a long history of operating many platforms, be it a browser, be it operating system, be it a you know, extraordinarily successful cloud platform and in all of that you know we worked hard to provide it to all players and be a great customer you've seen us work on our models with other companies including Apple with whom we compete in many many areas similarly we view our TPU systems as an important platform we are building we want to be world class in how we build it that means you're putting it against market forces testing it and competing for people who would have the most demanding workloads on top of it and I think that's what makes sure those teams are continuing to be at the frontier so that's how we think about it and over time I think you know that always ends up in expanding opportunities and we've been able to do well taking that approach over a very long period of time second on agentic behavior I mean to the earlier question and I think I should have emphasized people really when people are approaching these agentic experiences we clearly see people are concerned about you know safety and trust I mean it is a very very high factor in how they want to use these things and you know over decades the trust we have built by delivering these experiences in a safe way across many consumer products with scale in billions of users as well as the putting in end to end as we are building our models and agents deploying them both with extensive testing the kind of real time monitoring we do as we deploy these at scale I think all of that will end up being a huge differentiator and we already hear about it from our users and I think they would vote with their feet as this frontier goes through.

Michael Nathanson1:12:46

Thank you.

Operator1:12:55

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 Friedland1:13:03

Thanks everyone for joining us today. We look forward to speaking with you again on our fourth quarter 2026 call thank you and have a good evening

Closing

Operator1:13:13

Thank you everyone this concludes today's conference call thank you for participating you may now disconnect