GOOG 2Q 25 result commentary -- Reports of my death are greatly exaggerated.

 GOOG 2Q 25 Result Summary—Reports of my death are greatly exaggerated

Very good results, basically across the board, with search accelerating. Double-digit revenue growth with margins holding.

Two areas of interest on the call were the increase in capital expenditure (capex) from $ 75 to $85B. Of course, this can be positive or negative depending on the returns generated by this capex. Management reiterated strong AI-driven cloud demand. Interestingly, increasing capex raises fears about the ability to generate returns, but cutting capex would raise fears about a lack of growth. Go figure.

Secondly, concerns over the changes in how searches are occurring and whether monetisation is weakening or not. To some extent, GOOG appear to be following client usage volumes and establishing where they lie before monetising. Engagement appears strong, which is a good base to build upon. Revenues are improving. GOOG is very active in search product development and has surpassed earlier expectations, with AI Overviews, AI Mode, Lens Shopping, Circle to search, Veo 3 AI videos, all recent inventions to protect the search moat. Search revenues re-accelerated this quarter (unexpected). META and GOOG also appear to be entrenching their hold on web-based advertisers with new products enhancing customer conversions. While the Gemini App now has 450m MAU, above expectations. The App appears to be the building block for a universal personal assistant. Paid clicks reaccelerated; however, this measure may be redundant given the change in clicks and their usefulness, is less clicks but more targeted, so more revenue. The impact of chatbots like GPT on search has been muted- so far.

Most capex is going into cloud, so we need to see income accelerating here. Certainly, Token usage is moving up from 480T in 5/25 to 980T by 7/25, which is staggering, suggesting the increased capex is warranted. GCP's operating income was 182% higher YOY and 142% higher QoQ. A ROI number would be useful here; I suspect it is low, but will grow a lot. Current margin 20.7% likely to go to 30%, driving GOOG NPAT higher. Use cases, especially in the commercial sphere, are critical and appear to be occurring, ie clients seeing attractive ROI on their cloud/AI spend.

YouTube remains the dominant CTV medium and appears to be increasing its lead, see below. Subscriptions etc continue to grow suggesting better quality mix of revenues and TAC is growing below revenues suggesting AAPL being less important, also positive.

A buy at $175, assuming a 20X PE exit and 12% eps 5Y CAGR gives a 10% return. Anything below $200 is ok.

Please note the disclosure

Some interesting bits and pieces followed by the result details below.

 

 

Sundar Pichai CEO

Q2 was a standout quarter for us with robust growth across the company.AI is positively impacting every part of the business, driving strong momentum.

This quarter, Search delivered double-digit revenue growth. Our new Search features continue to perform well. AI Mode has launched in the U.S. and India and is going well, while AI Overviews now has over 2 billion monthly users across more than 200 countries and territories and 40 languages.

AI stack

First, AI infrastructure. We operate the leading global network of AI-optimized data centers and cloud regions. We also offer the industry's widest range of TPUs and GPUs along with storage and software built on top. That's why nearly all GenAI unicorns use Google Cloud. Our AI infrastructure investments are crucial to meeting the growth in demand from cloud customers.

Next, world-class AI research, including models and tooling. We continue to expand our Gemini 2.5 family of hybrid reasoning models, which provide industry-leading performance in nearly every major benchmark. We have some of the best models available today at every price point. Our 2.5 models have been a catalyst for growth, and 9 million developers have now built with Gemini.

Since May, over 70 million videos have been generated using Veo 3. And we recently introduced a feature in the Gemini app to turn photos into videos, which people absolutely love.

Third, our products and platforms. We are bringing AI to all our users and partners through surfaces like Workspace, Chrome and more. The growth in usage has been incredible. At IO in May, we announced that we processed 480 trillion monthly tokens across our surfaces. Since then, we have doubled that number, now processing over 980 trillion monthly tokens, a remarkable increase.The Gemini app now has more than 450 million monthly active users, and we continue to see strong growth in engagement with daily requests growing over 50% from Q1. In June alone, over 50 million people used AI-powered meeting notes in Google Meet. And powered by Veo 3, our new short video product in Workspace called Google Vids reached nearly 1 million monthly active users. And we are really pleased with the growth in subscriptions, which got a boost from our Google AI Pro and Ultra plans.

Search

First up, this is an incredibly exciting moment for Search. We see AI powering an expansion in how people are searching for and accessing information, unlocking completely new kinds of questions you can ask Google. Overall queries and commercial queries on Search continue to grow year-over-year. And our new AI experiences significantly contributed to this increase in usage. We are also seeing that our AI features cause users to search more as they learn that search can meet more of their needs. That's especially true for younger users.

Let me go deeper on our new search experiences. We know how popular AI Overviews are because they are now driving over 10% more queries globally for the types of queries that show them, and this growth continues to increase over time. AI Overviews are now powered by Gemini 2.5, delivering the fastest AI responses in the industry. We also saw strong growth in the use of multimodal search, particularly the combination of lens or Circle to Search together with AI overviews. This growth was most pronounced among younger users.

Our new end-to-end AI search experience, AI Mode continues to receive very positive feedback, particularly for longer and more complex questions. It's still rolling out, but already has over 100 million monthly active users in the U.S. and India. We plan to keep enhancing the AI Mode experience for users by shipping great features fast. That includes our advanced research tool Deep Search and more personalized responses.

Cloud

Google Cloud. We see strong customer demand, driven by our product differentiation and our comprehensive AI product portfolio. Four stats show this. One, the number of deals over $250 million, doubling year-over-year; two, in the first half of 2025, we signed the same number of deals over $1 billion that we did in all of 2024. Three, the number of new GCP customers increased by nearly 28% quarter-over-quarter; four, more than 85,000 enterprises, including LVMH, Salesforce and Singapore's DBS Bank now build with Gemini, driving a 35x growth in Gemini usage year-over-year.

We've also integrated AI agents deeply into each of our cloud products.

We are also focused on building a flourishing AI agent ecosystem. We introduced an open source agent development kit, which now has over 1 million downloads in less than 4 months. We also introduced Agentspace, an open and interoperable enterprise chat search and agent platform.

You Tube

Turning now to YouTube. Nielsen data shows YouTube has led U.S. streaming watch time for over 2 years. A generation that grew up with YouTube on their devices is now increasingly watching their favorite creators and content on their televisions.

we now average over 200 billion daily views on YouTube Shorts. AI is helping improve our recommendations and auto dubbing, which translates to better returns for creators and brands by dramatically increasing the potential audiences they can reach. And today, we began rolling out a whole draft of new AI tools for creators on YouTube Shorts. YouTube continues to diversify its subscription options, recently expanding its premium light offerings to 15 new countries with more to come.

Waymo

Waymo continues to scale and expand to safely serve more riders in more places. Last month, Waymo launched in Atlanta, more than doubled its Austin service territory and expanded its Los Angeles and San Francisco Bay Area territories by approximately 50%. Waymo also launched teen accounts, starting with riders aged 14 to 17 in Phoenix. Overall, great momentum here. The Waymo driver has now autonomously driven over 100 million miles on public roads. And the team is testing across more than 10 cities this year, including New York and Philadelphia. We hope to serve riders in all 10 in the future.

Philipp Schindler COO

The 12% increase in Search and other revenues was led by growth across all verticals with the largest contributions from retail and financial services. YouTube saw similar performance across verticals. It's 13% growth in advertising revenues was driven by direct response followed by brand.

Google Lens search is one of the fastest-growing query types on Search and grew 70% since this time last year. Majority of lens searches are incremental, and we're seeing healthy growth for shopping queries using lens.

And then there's Circle to Search, which is now in over 300 million Android devices.

Now people can try billions of clothing products on themselves virtually. Early results and engagement have been extremely positive, particularly with Gen Z users and we'll be bringing this functionality to all U.S. users imminently.

Moving to ads where our strategy to reinvent the entire marketing process with AI is delivering value for our customers and our business. Last quarter, we introduced AI Max and Search, a new suite of AI-powered features in existing search campaigns. Advertisers that activate AI Max and Search campaigns typically see 14% more conversions.

Campaigns using Smart Bidding Exploration, see a 19% increase in conversions on average. On creatives, we launched Asset Studio using our latest models to help businesses, large and small, generate creative assets. Small businesses benefit from top quality assets and deployment scaling capabilities, but larger businesses can go faster from proof of concept to launch and resize at lower cost. Over 2 million advertisers now use Google's AI powered asset generation tools to run ads, a 50% increase on this time last year.

YT-We're seeing both the volume and the price of ads and shorts increase, particularly in developed markets. The feed-based nature of the product allows for more ad opportunities on average, and this growth is further supported by ad formats native to shorts, AI-powered ad creative resizing tools, improved ad targeting and the rise in viewer engagement. In the past 12 months, YouTube ads viewed on CTV screens drove over 1 billion conversions. We saw strong growth in retail thanks to CTV shopping ads, which allows viewers to shop directly via QR codes, helping us leverage direct marketing opportunities.

Anat Ashkenazi CFO

We had another solid quarter in Q2. Consolidated revenue of $96.4 billion increased by 14% or 13% in constant currency.

Search and YouTube advertising, subscription platforms and devices and Google Cloud each had double-digit revenue growth this quarter reflecting strong momentum across the business. The biggest driver of growth was expense for legal and other matters, which reflected the impact of $1.4 billion charge related to a settlement in principle of certain legal matters.

Operating income increased 14% this quarter to $31.3 billion and operating margin was 32.4%. Operating margin benefited from strong revenue growth and continued efficiencies in our expense base, partially offset by the legal charge I mentioned earlier, and a significant increase in depreciation expense. Net income increased 19% to $28.2 billion, and earnings per share increased 22% to $2.31.

We generated free cash flow of $5.3 billion in the second quarter and $66.7 billion for the trailing 12 months

Subscription platforms and devices revenues increased 20% to $11.2 billion, primarily reflecting growth in subscription revenues. This growth was driven by YouTube subscription offerings followed by Google One, with the growth in paid subscriptions being the biggest driver of revenue growth. Google Services operating income increased 11% to $33.1 billion.

Operating margin was flat year-on-year at 40.1% as healthy revenue growth and continued efficiency in our expense base were partially offset by the legal charge I mentioned earlier.

Note GCP includes workspace.

Google Cloud operating income increased to $2.8 billion, and operating margin increased from 11.3% to 20.7%. As we ramp our AI investments, we continue to focus on driving improvements in productivity and efficiency to offset growth in technical infrastructure-related expenses, particularly from higher depreciation. Google Cloud backlog increased 18% sequentially in Q2 and 38% year-over-year, reaching $106 billion at the end of the quarter.

Within Other Bets, we're allocating more resources to businesses like Waymo, where we see opportunities to create additional value.

The vast majority of our CapEx was invested in technical infrastructure, with approximately 2/3 of investments in servers and 1/3 in data centres and networking equipment. In Q2, we returned capital to shareholders through repurchase of stock of $13.6 billion and dividend payments of $2.5 billion.

Outlook

First, in terms of revenues, we're pleased with the overall momentum we're seeing across the business. As for our segments in Google Services, advertising revenues in the second half of 2025 will be affected by the following: The continued lapping of the strength we experienced in financial service verticals throughout 2024 and year-over-year comparisons will be negatively impacted by the strong spend on U.S. Election in the second half of 2024 and particularly on YouTube.

In Cloud, as I mentioned, the demand for our products is high as evidenced by the continued revenue growth and the cloud backlog of $106 billion. While we have been working hard to increase capacity and have improved the pace of server deployment, we expect to remain in a tight demand supply environment going into 2026.

Given the strong demand for our cloud products and services, we now expect to invest approximately $85 billion in CapEx in 2025, up from a previous estimate of $75 billion. Our updated outlook reflects additional investment in servers, the timing of delivery of servers and an acceleration in the pace of data center construction, primarily to meet cloud customer demand. Looking out to 2026, we expect a further increase in CapEx due to the demand we're seeing from customers as well as growth opportunities across the company.

In the second quarter, depreciation increased $1.3 billion year-over-year to $5 billion, reflecting a growth rate of 35%. Given the recent increase in CapEx investments, we expect the growth rate and depreciation to accelerate further in Q3. Second, as we've previously said, we expect some headcount growth in 2025 in key investment areas. In the third quarter, we expect a sequential increase in total headcount additions due in part to the hiring of new graduates. And third, Q3 will reflect the expense associated with the upcoming August launch of the new Pixel family of products.

Cloud has reached an annual revenue run rate of more than $50 billion and is delivering margin expansion while continue to invest to meet customer demand.

Question-and-Answer Session

Monetization

But overall, we expect as we build out our organic experiences. We have a good understanding of how to continue training on monetization, so that will work well with organic experiences. And -- but we will lead with the organic experience.

So in terms of newer surfaces like Gemini app, et cetera, we'll focus on the organic experience for the near term. But just like we are doing with AI Overviews and with AI Mode over time, we'll be able to bring very, very good commercial experiences there as well. And we think people will adapt to them as they've always done. Yes. YT-We also have a very deep understanding of the monetization side here. Where are we monetizing more with ads, where can we potentially monetize more with subscriptions. So I think we will continue this as a double tier strategy actively going forward.

Capex

but we are planning ahead, and we are investing and -- but overall, it's exciting to see the traction, particularly in cloud. I think the comprehensiveness of our AI portfolio breadth of our offerings, both providing our models on GPUs and TPUs for our customers. All of that has been really driving demand. And so we are investing to match up to it.

On the CapEx on the cloud side, look, I think, we are definitely investing because we are delivering a lot of value through our cloud offerings. And I think it's important to understand as we build more and more of an installed base with Google Cloud. We have very high customer satisfaction. Our churn rates are very low, and we are much more efficient in the investments needed to grow those lines of business.

So you're seeing all that play out in our margin trajectory, particularly if you look at it annually sequentially over the past few years. And so all that gives us confidence as we are investing in this, we'll be able to have a healthy ROI on our investments. And particularly in this AI moment, there's definitely -- the value we are delivering to the customers is also growing pretty significantly on a forward-looking basis. And so I think all that will help us do well here.

Paid clicks -monetisation

I think we said this before. We manage the business to drive great outcomes for our users and an attractive ROI for our advertisers. We actually don't manage to pay clicks and CPC targets. Some of the product and policy changes we make actually drive better monetization at the expense of paid clicks. You will actually see in the 10-Q, pay clicks were up 4% year-on-year. But a number of factors affect these metrics from quarter-to-quarter, such as a few examples, advertiser spending, product changes, policy changes, user engagement and so on. So it's really important when it comes to pay clicks and CPCs to avoid drawing like overly broad conclusions solely based on these metrics.

Use of agents

The good news is we are making robust progress. We think we are at the frontier there. And in all of these areas, when you look back on a 12-month basis, you end up making the models much more efficient for any given capability. So the forward-looking trajectory, I think, will really unlock these agentic experiences. We see the potential in being able to do them, but they're a bit slow and costly and takes time, and sometimes are brittle, right? But they're making progress on all of that. And I think that's what will really unlock. And I expect 2026 to be the year in which people kind of use agentic experiences more broadly, right? And so it's an exciting opportunity ahead.

AI Mode vrs Gemini App

On your second question on AI Mode versus Gemini stand-alone app, broadly, there are some use cases where you can get a great experience in both places, but there are use cases that are very specific. I think where the queries are information-oriented but people really want to rely on the information, but I have the full power of AI. I think AI mode really shines in that. You can go there, and you know it's backed up. The Gemini models are using search deeply as a tool. And so it's on grounded in that search experience. And I think users are responding very positively to it. And whereas the Gemini stand-alone app, you see everything from -- people can have a long conversation of chat just trying to pass time, right, in the Gemini app.

You've seen early cases where people may get into it in a therapy like experience, right? So these are all emerging experiences of what people do. And I think this is why I'm glad we have both surfaces and we can innovate in both of these areas. And of course, there will be areas which will be commonly served by both applications. And over time, I think we can make experience more seamless for our users.

Look, I think between these 2 surfaces, you're pretty much covering the entire breadth and depth of what humanity can possibly do. So I think the split for 2 surfaces to tackle at this moment. Obviously, you are right, Search is more information focused. And we think of the Gemini app as more your assistant, more personal, proactive and powerful assistant for every aspect of your daily life. And so you can imagine wanting to call deeply or create a long video, et cetera, like those things can be done by the Gemini app today better.

Over time, like we've always done, we've gone through these evolutions before, like, as you point out, we can understand user intent better and abstract some of the complexity for our users. At one point, people used to go to -- query separately for text, differently from images, definitely from videos, et cetera, and we kind of made it all seamless with Universal Search.

So we have the experience of being able to bring together experiences in a way that makes sense for users and do the heavy lifting for them. But I think when you're in this early stage of new emerging paradigms, I think we want to make sure we can meet them where they -- what they are expecting today. And over time, I think it will give us an opportunity to serve them better. So I think that's how we are thinking about it.

On agentic experience. Look, I think there was an earlier question on the technology aspects of it and how we are making progress. Obviously, there is the value proposition for all the players involved. And I think that's going to be an equally important thing to create the unlock here. And I do think over time, users will it's clear to me as we make progress on the agentic experience, it's going to be a much better experience for users, right? And so you'll find savvier players leaning into these experiences, and that will help them grow and meet this moment.

And I think -- so I do think it's an opportunity for some of the players. And so you are right, just like the early days of the web, there are aspects about it, which will expand access, grow the use cases, et cetera. And I think that elements are there. But I do think it's important. It's not just a technology play, but we have to solve the business models for varying players involved. So I think that's going to be an important part of this evolution as well.

Subscription growth

On the first thing on subscriptions, we definitely -- Google One has been an attractive value proposition powered by storage. But with now our AI plans, including both Pro and Ultra and particularly with the 2.5 series of models, we have definitely seen accelerated traction. So it was a very healthy quarter. And so we are definitely excited about the opportunities ahead. And you will find through this moment, I think, we'll be able to drive growth in that area based on our AI offerings. And so it's definitely an area we are both excited by, and we are actually seeing traction, particularly in the last quarter ever since we introduced 2.5 Pro. So we are excited about the trajectory there.