Q2 Fiscal 2025 Financial Highlights (Ended June 30, 2025):

• Consolidated Revenue: $96.43 billion, marking a solid 14% increase year-over-year. This topped Wall Street's consensus estimates of approximately $94 billion.

• Earnings Per Share (EPS): $2.31, a strong 22% increase year-over-year, surpassing the forecasted $2.17-$2.18.

• Net Income: Increased 19% year-over-year to $28.2 billion.

• Operating Margin: Held steady at 32.4%, despite significant ongoing investments and a notable legal charge.

Diving Deeper: Segment Performance & Analysis

Alphabet's Q2 performance demonstrated broad-based strength, with double-digit growth across its primary revenue drivers.

• Google Services (Advertising & Subscriptions): This segment, encompassing Search, YouTube ads, and Google subscriptions, remained the dominant revenue contributor, generating $82.54 billion, up 12% year-over-year.

  • Google Search & Other revenue: Climbed to $54.19 billion, up 12% year-over-year. Management noted that new AI features in Search, such as AI Overviews (now powered by Gemini 2.5 and driving over 10% more queries globally) and AI Mode, are significantly contributing to increased usage and are monetizing at approximately the same rate as traditional search ads.

  • YouTube Ads revenue: Grew 13% to $9.80 billion, maintaining strong momentum. Shorts are now earning as much per watch hour as traditional in-stream ads in the U.S., and even exceeding it in some countries.

  • Google Network revenue: Saw a slight decline of 1.2% year-over-year.

  • Google Subscriptions, Platforms, and Devices: This segment was a standout, growing 20% to $11.2 billion, driven by offerings like Google One and YouTube Premium.

• Google Cloud: This segment was a clear highlight, with revenue surging 32% year-over-year to $13.62 billion. More impressively, Google Cloud's operating income more than doubled to $2.83 billion, with its operating margin expanding significantly from 11.3% to 20.7%. This remarkable improvement in profitability underscores Alphabet's successful execution in scaling its cloud business and effectively competing in the enterprise AI infrastructure space. The annual revenue run-rate for Cloud now exceeds $50 billion, and its backlog increased 18% sequentially to $106 billion, signaling robust future demand.

• Other Bets: This segment, which includes early-stage projects like Waymo (autonomous driving) and Verily (life sciences), generated $373 million in revenue but reported an operating loss of $1.25 billion. While still a drag on overall profitability, Waymo continues to make tangible progress, expanding its services to new cities.

Management's Strategic Commentary: AI at the Core & Increased Investment

CEO Sundar Pichai emphasized that "AI is positively impacting every part of the business, driving strong momentum." He highlighted that Alphabet is "leading at the frontier of AI and shipping at an incredible pace." Key points from management included:

• AI Integration: AI is deeply integrated across Search, YouTube, and Cloud, enhancing user experiences and driving monetization. The rapid adoption of Gemini (with over 450 million monthly active users and daily requests growing over 50% from Q1 2025) and its deployment across Google products and Cloud customers (over 85,000 enterprises using Gemini) were key themes.

• Capital Expenditure Surge: One of the most notable aspects of the report was the dramatic increase in capital expenditures, which rose 70% year-over-year to $22.45 billion in Q2. Management increased its full-year 2025 CapEx guidance to approximately $85 billion (up $10 billion from previous expectations), citing strong demand for AI infrastructure and expanded cloud computing capacity. This reflects a strategic decision to invest heavily to meet future AI and cloud demand.

• Profitability vs. Investment: While the surge in CapEx impacted quarterly free cash flow (which declined 61% year-over-year to $5.30 billion), the trailing twelve months free cash flow remains healthy at $66.73 billion. This suggests Alphabet is strategically trading short-term cash generation for long-term growth and market positioning in AI.

Bottom Line:

Alphabet's Q2 2025 earnings demonstrate a company firing on multiple cylinders, with AI acting as a powerful accelerant across its core businesses. The strong performance of Google Search and YouTube advertising, coupled with the impressive growth and expanding profitability of Google Cloud, provides a solid foundation. The significant increase in capital expenditures, while impacting near-term free cash flow, is a necessary and strategic investment to maintain leadership in the rapidly evolving AI landscape.

We believe Alphabet is well-positioned to capitalize on the AI revolution, leveraging its vast data, engineering talent, and existing user base. The company's ability to drive both top-line growth and expand margins in its cloud business, even while making massive AI infrastructure investments, speaks to its operational strength. While the "Other Bets" remain speculative, the core business's performance provides the necessary financial cushion. We continue to view Alphabet as a compelling long-term investment, poised to benefit from the pervasive integration of AI into digital life.