Alphabet (GOOGL) Q3 2026 Earnings Call Transcript

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Head of Investor Relations - James Friedland Chief Business Officer - Philipp Schindler Chief Executive Officer, Google Cloud - Thomas Kurian Chief Financial Officer - Anat Ashkenazi Revenue -- $127.6 billion, representing 25% year-over-year growth in both reported and constant currency. Google Cloud Revenue -- $30.7 billion, increasing 103% driven by demand for AI infrastructure, AI solutions, and sales of TPU systems. Google Search & Other Revenue -- $63.3 billion, reflecting 12% growth led by strong performance in retail and finance. Non-GAAP EPS -- $2.12, down from $2.87 in the prior-year period due primarily to unrealized losses in the investment portfolio. Google Cloud Operating Margin -- 36.2%, expanding from 23.7% in the previous year as operating income more than tripled to $11.1 billion. Capital Expenditures -- $51.4 billion, with approximately 65% of technical infrastructure spend focused on servers and networking equipment. Free Cash Flow -- negative $9.1 billion, impacted by high technical infrastructure investments and a $5.2 billion cash payment for a European Commission fine. AI Token Processing -- 32 billion tokens per minute, representing 40% growth from the prior quarter and a fourfold increase from the previous year. Gemini App Users -- 1 billion users, making it the fastest-growing product in the company's history. Google Cloud Backlog -- $561 billion, of which the company expects to recognize approximately 55% as revenue over the next 24 months. Search Query Growth -- Management reported the highest year-over-year query growth rate in five years, attributed to AI-driven usage increases. TPU Performance -- The 8t generation offers 2.7-fold better training performance, while the 8i provides 80% better inference price performance over prior models. Waymo Operational Scale -- 300 million fully autonomous miles driven to date, with service recently expanded to San Antonio, San Diego, and Tampa. Other Income and Expense -- negative $8.2 billion, primarily reflecting an unrealized loss from a decline in the value of the company's investment in SpaceX. Ad Creative AI Adoption -- 1.5 billion campaign assets were generated using Gemini models in the third quarter, a sevenfold increase year over year. Inventory Balance -- $13.3 billion, up from $2.4 billion at year-end 2025 due to the buildup for TPU system sales. Total Headcount -- 204,757 employees, an increase from 190,167 at the end of the prior-year period. Visual Search Usage -- 50 billion visual searches per month, reflecting a shift in how users interact with Search services. Need a quote from a Motley Fool analyst? Email [email protected] Ashkenazi warned that "margin headwinds in the near term" are expected in the Cloud segment as the company begins utilizing third-party compute capacity to meet demand. Ashkenazi noted that the company "will continue to lap the search performance acceleration that began in the third quarter last year, which will pressure revenue growth in Q4." Alphabet Inc. ( GOOGL +1.34% ) reported a 25% revenue increase for the third quarter, reaching a half-trillion dollar annual run rate. Management stated that growth was driven by continued momentum in Search and a 103% revenue increase in Google Cloud, which benefited from high demand for AI infrastructure and TPU system sales. The company introduced the Gemini 4 series, including the Carbon and Argon models, while scaling AI-driven features like AI Mode and AI Overviews. While operating income rose 30% to $40.6 billion, net income was adversely affected by an unrealized investment loss in SpaceX and a substantial payment related to a European Commission legal ruling. CEO Pichai reported that internal software teams using the Argon model shipped 35% more code with 30% fewer errors during the quarter. The company expanded its infrastructure capacity through new partnerships with Oracle and Crux AI to deliver TPU systems to external data centers. Management noted that queries in AI Mode are on average threefold longer than traditional searches, with 1 in 5 involving voice, images, or documents. Google Cloud now operates 18 distinct product lines that each generate more than $1 billion in annual revenue. The company launched the Universal Cart feature to support agentic commerce, facilitating direct checkout for brands including Nike and Chewy across Google platforms. TAC (Traffic Acquisition Costs) : Payments Google makes to partners like Apple and website owners to direct search traffic to its platforms. TPU (Tensor Processing Unit) : Custom-designed AI hardware developed by Google to accelerate machine learning workloads. GCP (Google Cloud Platform) : Google's suite of public cloud services, including compute, storage, and data analytics. AI Mode : A specialized search experience designed for conversational, multimodal, and complex agentic queries. OI&E (Other Income and Expense) : Non-operating line items including interest income, interest expense, and gains or losses on equity investments. Agentic Commerce : AI-driven shopping experiences where automated agents perform tasks like research, comparison, and transactions for users. Operator: Welcome, everyone. Thank you for standing by for the Alphabet Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. Please go ahead. James Friedland: Thank you. Good afternoon, everyone, and welcome to Alphabet's Third Quarter 2026 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler, Thomas Kurian and Anat Ashkenazi. Now I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise. And now I'll turn the call over to Sundar. Sundar Pichai: 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. Alphabet revenues grew 25% year-over-year. We are now at $0.5 trillion 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. In fact, our year-over-year query growth rate is the highest it's been in the last 5 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 there's huge demand. 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. 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. Our first-party model APIs are now processing nearly 32 billion tokens per minute, 40% more than last quarter and more than 4x what we processed a year ago. And with Gemini 4 Argon and now Carbon, which we announced today, we are excited to be leading at the frontier. 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. 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. 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. It ranks #1 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. We are rolling Carbon out first to a subset of trusted cyber defenders before we expand access, and it's being tested by the U.S. 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. 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. 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. 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. 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. Their queries are longer, personalized and multimodal. Queries in AI Mode are on average 3x longer than traditional searches, and 1 in 5 AI Mode searches globally use voice, images or documents. 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. 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. 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 the next step, we are bringing these features to Search and also, of course, to our 1 billion users on the Gemini app. People are already using the Gemini app to do more than ask questions. They're using it to do things, including complex multistep agentic queries. Our Gemini 4 series has been a really big step forward here and has already been handling these complex tasks really well. 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 U.S. 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. 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. 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, Philipp. In addition, the majority of AI Mode queries are incremental, creating more monetization opportunities over time. 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. 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 multiturn ads and AI Mode in the U.S. In closing, I want to thank Googlers everywhere for their incredible execution and our customers and partners for their continued trust. Thomas, over to you. Thomas Kurian: 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 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. TPU system sales were also a meaningful contributor. Over the past 12 months, more than 2,600 customers have used at least 100 billion tokens and nearly 75 at least 10 trillion tokens on Gemini Enterprise. Nearly 90% of the Fortune 100 use Gemini Enterprise, and customers who use Gemini Enterprise in Q3 2025 more than quadrupled their spend with us year-over-year. 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. Gemini Enterprise now includes the Gemini agent 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. 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 9 months to enhance manufacturing safety, optimize supply chains and cut service times for customers by 50%; Ulta Beauty, who built the Ulta AI shopping assistant, resulting in a 3x higher conversion rate than traditional browsing on their site. Gemini is also driving acceleration for our database, analytics and cybersecurity products. 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. Gemini uses our Lakehouse to access information from multiple systems with 0 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. Customers include Deutsche Telekom, which uses BigQuery, Cloud Storage and Knowledge Catalog to build a unified data lakehouse across 40-plus legacy on-premise systems. Etsy, which migrated 3 petabytes of data to unified lakehouse, 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. Our Gemini Flash cyber models are frontier models that automate vulnerability discovery across 20 programming languages and patch 2.6x more reliably than other models. 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 and Google Threat Intelligence autonomously analyzes millions of external events every day with 98% accuracy. And more than 95% of Wiz customers are adopting AI-powered features, and growth continues. These security tools protect critical infrastructure, including financial institutions like Banorte and Jack Henry and telecommunication providers such as AT&T. 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. TPU systems are specialized systems built for AI, combining hardware, compute storage and networking with systems components and optimized software for training and inference. TPU 8t and 8i offer up to 2.7x better training performance and 80% better inference price performance, respectively, 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 TorchTPU, which allows users to train, serve and deploy PyTorch models on TPUs, using the tools they're already familiar with and rely on. Nearly 100 customers use 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 pretraining of their foundation models on the latest generation of TPUs, we're also working with new frontier model companies, including Mirendil and Physical Intelligence; capital markets firms, including Citadel Securities and Jump Trading; universities like Caltech; and public sector service providers, including Cassava and Cirrascale. 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. Over to you, Anat. Anat Ashkenazi: 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. I'll end with some commentary on 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. Consolidated revenues were $127.6 billion, up 25% in both reported and constant currency. Total cost of revenue was $51.4 billion, up 24%. TAC was $16.4 billion, up 10%. Other cost of revenues was $35.1 billion, up 32%, driven by hardware costs primarily related to the sales of TPU systems, increase in depreciation, content acquisition costs and technical infrastructure operations costs. Total operating expenses were up 20% to $35.6 billion. R&D expenses increased by 36%, driven by compensation, primarily for investment in AI talent as well as depreciation. Sales and marketing expenses were up 22% due to investments in Gemini and compensation. And G&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. Operating income increased 30% to $40.6 billion, and operating margin was 31.8%. Other income and expenses was negative $8.2 billion due primarily to unrealized loss from our investment in SpaceX from a decline in its stock price in the third quarter. Net income and earnings per share decreased due to the decline in OI&E. We generated strong operating cash flow of $42.3 billion in the third quarter and $179.6 billion for the trailing 12 months. Operating cash flow was negatively impacted by the buildup of inventory for TPU system sales as well as a $5.2 billion cash payment for a 2018 EC fine following the conclusion of the appeal process.

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