Alphabet Q2 2025 earnings call: Strong AI foundation but headwinds ahead

Alphabet continued to record decent growth in Q2 2025, underpinned by its long-term investments in its differentiated full-stack approach to AI across AI infrastructure, world-class research, models and tooling, and products and platforms. The quarter saw strong double-digit growth in key segments including Search, YouTube Ads, and particularly Google Cloud, where AI-powered solutions drove significant momentum.

Overall revenue increased 13.8% year-on-year to US$96.4 billion in Q2 2025, driven by double-digit gains across all segments except Google Network and Other Bets.

The 11.7% year-on-year growth in Google Search in Q2 2025 was driven by growth across all verticals and was predominantly led by the retail and financial, with particular strength in insurance, followed by healthcare. The 13.1% growth in YouTube Ads was fuelled by strong demand from direct response, followed by brand.

The segmental year-on-year growth of Google Subscriptions, Platforms, and Devices in Q2 2025 was driven by the expansion of paid subscriptions including YouTube subscription offerings, followed by Google One.

The annual revenue run rate of Google Cloud exceeded US$50 billion in Q2 2025, driven mainly by strong performance in Google Cloud Platform across Core and AI products.The revenue growth in Google Workspace was fuelled by the increase in both the average revenue per seat and the number of seats. Operating margin almost doubled from 11.3% to 20.7% because of revenue growth and cost efficiencies. The margin was partially offset by higher technical infrastructure usage costs including the associated depreciation charges. Google Cloud backlog increased 18% sequentially and 38% year-over-year to US$106 billion in Q2 2025, which indicates future revenue stability. Customer demand for Cloud products was strong as the company signed deals totalling multi-billion dollars in the first half of 2025. The ongoing capacity constraints are likely to continue into 2026 despite increased investment for the long term.

Despite the 2.2% growth in revenue from Other Bets, its operating loss widened 9.9% year-on-year to US$1.2 billion in Q2 2025. As Waymo is delivering more tangible and promising results from business expansion, Alphabet is allocating more resources to this venture under Other Bets.

Capital expenditure totalled US$22.4 billion in Q2 2025, with a notable spending on servers followed by data centres and networking equipment. Full-year 2025 capital expenditure guidance increased from US$75 billion to US$85 billion due to server delivery and accelerated data centre construction to meet Google Cloud demand. Capital expenditure will trend higher in 2026 because of sustained demand and growth opportunities, leading to increased depreciation and margin pressure.

Operating income increased 14.0% year-on-year to $31.3 billion in Q2 2025, driven by strong revenue growth and better cost efficiencies. Operating margin remained flat at 32.4% during the quarter due to higher depreciation, YouTube content acquisition costs as well as US$1.4 billion legal charges for violating data privacy and security laws. Net income increased 19.4% year-on-year to $28.2 billion over the same period.

In Q2 2025, Alphabet’s cash and cash-equivalents stood at US$95.7 billion. During the quarter, it spent US$13.6 billion on share buybacks and distributed dividend amounting to US$2.5 billion to shareholders.

Current favourable foreign exchange rates is one of the tailwinds for the business in the coming quarters. However, advertising revenues in 2H 2025 will be negatively impacted by difficult year-over-year comparisons. It had strong contributions from the financial services vertical in 2024 as well as robust U.S. election ad spend in 2H 2024, notably on YouTube. Headcount is expected to grow sequentially in Q3 2025 and throughout 2025 across key investment areas. There will also be marketing expenses in line with the launch of new Pixel products in August 2025.

Google Services: Search & Other

The number of overall and commercial queries on Search continue to increase year on year as users leverage AI to explore more complex and new questions. These AI features have been particularly embraced by younger users. Search now offers a new, free AI feature to call local businesses on users’ behalf for tasks like price checks and reservations. While Search remained information-focused, Gemini delivers more personalised, proactive, and powerful solutions, including deep coding and video creation.

Multimodal search including Lens, Circle to Search, AI Overviews, and AI Mode is growing especially among younger users. Google Lens has been a fast-growing query type, surging 70% year-on-year, with most of these visual searches being incremental rather than cannibalising traditional search. Its real-time function is popular among users with shopping intent. A new virtual try-on experience for clothing has been introduced to select US Search Labs users in Q2 2025. The function showed positive early response, particularly among younger consumers, and will soon be expanded nationwide.

Circle to Search is now available on over 300 million Android devices, enabling users and gamers to ask follow-up questions within the same application.

Powered by Gemini 2.5, AI Overviews is gaining popularity, now reaching over two billion monthly active users across forty languages. Designed for specific helpful query types, AI Overviews has been monetised at a rate similar to traditional Search.

Equipped with an advanced research tool (Deep Search), AI Mode has over one hundred million monthly active users in the U.S. and India. It has been well-received for handling lengthier and more complex questions. It is expanding fast and will be rolled out to more users.

The AI strategy is transforming the ads marketing process, delivering significant value and improved performance for advertisers through innovations in search, media buying, and creative asset generation. The number of advertisers running ads with Google’s AI-generated creative increased 50% year-on-year to over 2 million.

Google Services: YouTube Ads

According to Nielsen, YouTube has topped the U.S. streaming watch time chart for over two years. Besides smartphones, tablets, and computers, connected TVs are increasingly becoming a primary destination for watching YouTube content. Its share of TV viewing reached a record high of 12.8% according to Nielsen. This strong performance is further bolstered by its global content strategy, as evidenced by its exclusive worldwide stream of the NFL’s first Friday game of the season, played live from Brazil this September.

On average, there are now over 200 billion views on YouTube Shorts on a daily basis. The volume and the price of ads in Shorts continue to increase particularly in developed markets. Revenue per watch hour on Shorts was on par with traditional in-stream video ads in the U.S. and even exceeds the latter in some countries.

Video generation model Veo 3 was introduced to ease content creation and spur further creativity. The text-to-video and photo-to-video model will be integrated with Shorts in the future. Shorts’ feed-based design, native ad formats, and AI-powered tools are significantly boosting its ad opportunities and viewer engagement.

AI helps improve its recommendation system and auto dubbing that enhances returns for creators and brands as well as reaching more potential audiences. YouTube is also enhancing how brands connect with creators, driving more effective partnerships and monetisation opportunities on the platform.

Google Services: Google Subscriptions, Platforms, and Devices

YouTube subscriptions are increasingly important for the video sharing platform. Alongside advertising, subscription forms part of the company’s dual-growth strategy according to Chief Business Officer Philipp Schindler. YouTube is expanding its Premium Lite subscription to additional 15 countries. Meanwhile, Its AI subscription plans including Google AI Pro and Ultra are gaining traction since the introduction of Gemini 2.5 Pro.

Google Cloud

Google Cloud continued to demonstrate strong growth, underpinned by robust customer demand. This was evident in Q2 2025, with deals above US$250 million doubling year-on-year. Notably, the number of deals over US$1 million signed in 2024 was achieved in the first half of 2025 alone. New Google Cloud Platform customers increased nearly 28% quarter-on-quarter. Over 85,000 enterprises, including LVMH, Salesforce, and Singapore’s DBS Bank, contributed to a 35x year-on-year growth in Gemini usage.

Underpinning this growth is Google’s robust AI infrastructure. The company operates a global network of AI-optimised data centres and cloud regions, offering the industry’s widest range of TPUs and GPUs, along with specialised storage and software. This infrastructure is crucial for meeting demand, delivering industry-leading performance and cost efficiency for both training and inference. Notably, nearly all Gen AI unicorns, including leading AI research labs like SAFE Superintelligence and Physical Intelligence, leverage Google Cloud, specifically its TPUs.

The Gemini 2.5 family of hybrid reasoning models is expanding, with improvements to the popular Flash model and the debut of a faster Flash Lite version. DeepMind plans to launch Deep Think soon, following the well-received performance of an advanced Gemini version. The Gemini models, available at every price point, have served as a catalyst for growth, attracting nine million developers.

The Gemini app is a key driver of direct user engagement, now boasting over 450 million monthly active users and seeing daily requests grow over 50% sequentially in Q2 2025. A new feature in the Gemini app to turn photos into videos has been well-received and is also rolling out to Google Photos users.

AI has been integrated into Google Workspace, which drives user engagement. In June alone, over 50 million people used AI-powered meeting notes in Google Meet. Additionally, Google Vids, its new short video product powered by Veo 3 in Workspace, reached nearly 1 million monthly active users. Veo 3 has been highly adopted, with over 70 million videos generated since May.

Other Bets

Waymo, the autonomous ride hailing company, has served over 100 million miles on public roads. It continues to expand its presence in Austin, Los Angeles, and San Francisco Bay Area. It was launched in Atlanta in June 2025. Riders aged between 14 and 17 can also use Waymo in Phoenix. It is now being tested across over ten cities including New York and Philadelphia.

Key analyst questions

While CEO Sundar Pichai acknowledged questions about monetisation, particularly regarding clicks with AI Overviews, he emphasised that the company’s strategy is to prioritise organic (non-ad) user experiences first. Similar to Search, Google expects to successfully integrate effective commercial experiences over time into AI Overviews and AI Mode, anticipating users to adapt to them well.

Instead of focusing on the 4% year-on-year growth in paid clicks, Alphabet prioritises the quality and value of ad interactions over sheer volume. It might implement changes that result in fewer clicks overall, but are of higher quality or more valuable to the advertiser. It ensures users see relevant, useful ads that enhance their experience as well as help advertisers achieve their returns on investment.

The company is making progress on agentic use of AI and will make agentic AI more broadly available for users in 2026.

Pichai believes AI will spur a new wave of innovation and deliver consumer experience on phones in the next few years followed by other medium like smart glasses, as evident in its US$150 million partnership with Warby Parker.

The fifth perspective

In conclusion, Alphabet’s Q2 2025 performance reflects a healthy underlying business driven by its significant AI advancements. Google Cloud’s increased investment efficiency is positively impacting its margin trajectory, providing strong confidence in a healthy ROI on significant Cloud investments, particularly in the growing AI environment.

However, with substantial ongoing investments in AI infrastructure and fierce competition from rivals like OpenAI’s ChatGPT, the stock’s immediate ‘buy’ appeal may be tempered. The long-term success hinges on its ability to translate its leading AI capabilities into sustained market share gains and optimised profitability amidst this dynamic landscape.