Alphabet Inc - Class C (GOOG) — Q2 2025 Earnings Call Transcript

Thank you. Good afternoon, everyone, and welcome to Alphabet's Second Quarter 2025 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler, 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.

Thanks, Jim. Good afternoon, everyone. Q2 was a standout quarter for us with robust growth across the company. As you saw at IO, we are leading at the frontier of AI and shipping at an incredible pace. 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. I'll give some more details on Search in a moment. We continue to see strong performance in YouTube as well as subscriptions, reflecting great momentum across these high-growth businesses. In the U.S., shorts now earn as much revenue per watch hour as traditional in-stream on YouTube. And in some countries, it even exceeds in-stream's rate. Cloud had another great quarter of strong growth in revenues, backlog and profitability, with its annual revenue run rate now exceeding $50 billion. We are seeing significant demand for our comprehensive AI product portfolio. This is all possible due to the long-term investments we've made in our differentiated full stack approach to AI, spanning AI infrastructure, world-class research, models and tooling and our products and platforms that bring AI to users worldwide. I'll briefly touch on the AI stack before turning to quarterly highlights. 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. In addition to improving our popular workhorse model Flash, we debuted an extremely fast flashlight version. We achieved gold medal level performance in the International Math Olympiad using an advanced version of Gemini with Deepting. We can't wait to bring Deepting to users soon. 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. I also want to mention Veo 3, our state-of-the-art video generation model. It has been a viral hit with people sharing clips created in the Gemini app and our new AI filmmaking tool Flow. Since May, over 70 million videos have been generated using Veo 3. We recently introduced a feature in the Gemini app to turn photos into videos, which people absolutely love. It's also rolling out to Google Photos users starting today. 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. This month at Samsung Galaxy Unpacked, we announced new Android and AI features available on Samsung's latest devices. We are really pleased with the growth in subscriptions, which got a boost from our Google AI Pro and Ultra plans. Now, some key highlights from Search, Cloud, YouTube, and Waymo for the quarter. 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 that can be asked on Google. Overall queries and commercial queries on Search continue to grow year-over-year. 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 dive 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 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 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 launching great features quickly. Next, Google Cloud. We see strong customer demand driven by our product differentiation and comprehensive AI product portfolio. Four statistics show this. One, the number of deals over $250 million doubled 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. Our models have served on our AI infrastructure, which offers industry-leading performance and cost efficiency for both training and inference. Along with our AI accelerators, we introduced new innovations in storage, including Anywhere Cache, which improves inference latency by up to 70%, and rapid storage, which delivers a 5x improvement in latency compared to leading hyperscalers. In addition, we have optimized AI software packages, including PyTorch and JAX with full open-source support for various AI training and serving demands. We've also integrated AI agents deeply into each of our cloud products. Wayfair is leveraging our databases integrated with AI to streamline data pipelines and deliver more personalized customer experiences. Vantel is leveraging our Gemini-powered data agents and BigQuery to review and act on product feedback more quickly. Target is using our Gemini-powered threat intelligence and security operations agents to improve cybersecurity. Capgemini is utilizing our AI software engineering agents to deliver higher-quality software faster by automating tasks from code generation to testing. BBVA says Gemini and Google Workspace is saving employees nearly 3 hours per week by automating repetitive tasks, rolling it out to 100,000 employees globally. We are also focused on building a flourishing AI agent ecosystem. We introduced an open-source agent development kit, which has now over 1 million downloads in less than 4 months. We also introduced Agentspace, an open and interoperable enterprise chat search and agent platform. Gordon Food Service is bringing Agentspace to its U.S. employees, enabling better, more efficient decision-making. Over 1 million subscriptions have been booked for Agentspace ahead of its general availability. 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, including billions of sports fans. They consume more than 40 billion hours of sports content on YouTube annually. In September, we’ll stream the NFL’s first Friday game of the season live from Brazil. From sports to shorts, 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. Today, we began rolling out a draft of new AI tools for creators on YouTube Shorts. Finally, YouTube continues to diversify its subscription options, recently expanding its premium light offerings to 15 new countries, with more to come. Lastly, Waymo continues to scale and expand to safely serve more riders in more places. Last month, Waymo launched in Atlanta, 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. The team is testing across more than 10 cities this year, including New York and Philadelphia, with hopes to serve riders in all 10 in the future. As I said, a standout quarter. A big thank you as always to our employees and partners for an amazing Q2. Philipp, over to you.

Thanks, Sundar, and hello, everyone. I'll quickly cover performance for Google Services for the quarter, then structure the rest of my remarks around the great progress we're delivering across search, ads, YouTube, and partnerships. Google Services revenues were $83 billion for the quarter, up 12% year-on-year, driven by strong growth in Search and YouTube, partially offset by a year-on-year decline in network revenues. 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. Its 13% growth in advertising revenues was driven by direct response followed by brand. Starting with search and other revenues, which delivered over $54 billion in revenue for the quarter. Shifts like AI are what propel our industry forward. Gemini's native multimodality is helping bring the offline audio and visual world back into the online world, creating new opportunities for Search. Let me share a few examples. Take visual queries. Google Lens search is one of the fastest-growing query types on Search and grew 70% since this time last year. The majority of lens searches are incremental, and we're seeing healthy growth for shopping queries using lens. You can obviously take this to the next level by moving from image to video-based capabilities like Search Live. Then there's Circle to Search, now on over 300 million Android devices. We've been adding capabilities to help people explore complex topics and ask follow-up questions without switching apps. For example, gamers can now use Circle to Search while playing mobile games to see an AI overview or answers. Just last week, we brought in new agentic capability directly into search for all U.S. users with AI-powered calling to local businesses. Finally, in shopping, where in Q2, we introduced a virtual trial experience for search labs users in the U.S. 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 bring this functionality to all U.S. users imminently. All these innovations are opening up completely new ways for people to use technology, bringing the offline world into the online world in ways that simply have not been possible before. Add in our amazing AI translation capabilities, and just imagine the possibilities. People can access more content in the language, and businesses, large and small, international or local, can reach even more customers. I'm excited about how all of these elements will come together and the opportunities ahead of us in Search. Moving to ads, 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. On media buying, Smart Bidding Exploration, the biggest update to bidding strategy in a decade, brings better performance to advertisers by allowing them to bid on less obvious but potentially higher value queries more often. Campaigns using Smart Bidding Exploration see a 19% increase in conversions on average. Demand gen continues to drive revenue growth and deliver measurable impact for our customers. As an example, Depop, Etsy's resell clothing marketplace, used a short-only demand gen campaign to drive new customers to the site. Short drove 80% buyer brand load and double click-through rates versus benchmarks. 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, while 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 compared to this time last year. Turning to YouTube, where we saw continued strong revenue growth driven by direct response followed by brand. YouTube creators are connected to their audiences like no others. As part of Brand Connect, we launched Creator Partnership Hub, allowing brands to work more easily with the right creators and tap into cultural moments. We introduced Veo 3, photo to video, and generative effects to shorts, making content creation easier and offering unexplored avenues for creativity. 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. A recent successful example comes from McDonald's U.S.A., which utilized YouTube creators to ignite awareness for the Minecraft movie meal. It leveraged YouTube Shorts partnership ads to increase its reach, generating a view-through rate 3.3x higher than the industry benchmark. Finally, on CTV, the momentum continues. According to the gauge report by Nielsen, YouTube has been #1 in streaming watch time in the U.S. for more than 2 years, hitting a record high of 12.8% of total TV viewing in June 2025. 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. As always, I'll wrap up with the momentum we're seeing in partnerships, where our customers increasingly recognize the strength and breadth of Google's ability to transform their business with AI. For instance, a new partnership with PayPal will improve the digital commerce experience for their merchants and customers. PayPal will expand its Google Cloud adoption for AI-driven recommendations, transaction processing, and enhanced security. This partnership broadens the availability and functionality of PayPal's payment services and capabilities across a range of Google products. In closing, I'd like to thank Googlers everywhere for their contributions and commitment to our success, as well as our customers and partners for their continued trust. Anat, over to you.

Thank you, Philipp. My comments will focus on year-over-year comparisons for the second 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 second half of 2025. 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. Total cost of revenue was $39 billion, up 10%. Tech was $14.7 billion, up 10%; and other cost of revenue was $24.3 billion, up 10%, primarily driven by content acquisition costs, largely for YouTube, followed by depreciation. Total operating expenses increased 20% to $26.1 billion. The biggest driver of growth was expense for legal and other matters, which reflected the impact of a $1.4 billion charge related to a settlement in principle of certain legal matters. R&D investments increased by 16%, primarily due to increases in compensation and depreciation expenses. Sales and marketing expenses increased 5%, primarily reflecting an increase in advertising and promotional expenses. Operating income increased 14% this quarter to $31.3 billion, with an operating margin of 32.4%. The operating margin benefited from strong revenue growth and continued efficiencies in our expense base, partially offset by the previously mentioned legal charge and a significant increase in depreciation expense. Net income increased 19% to $28.2 billion, while earnings per share rose by 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. Free cash flow in the second quarter was affected by a sizable sequential increase in CapEx and cash tax payments as we make federal tax payments in the second quarter for both Q1 and Q2. We ended the quarter with $95 billion in cash and marketable securities. Turning to segment results, Google Services revenues increased 12% to $82.5 billion, reflecting strength in Google Search and YouTube advertising and subscriptions. Google Search and other revenues increased by 12% to $54.2 billion. Search and other revenues delivered growth across all verticals, with the largest contributions coming from retail and financial services. YouTube advertising revenues increased 13% to $9.8 billion, driven by direct response advertising, followed by brand. Network advertising revenue of $7.4 billion was down 1%. 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 by 11% to $33.1 billion, with an operating margin that 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. Turning to the Google Cloud segment, which delivered very strong results this quarter. Revenues increased by 32% to $13.6 billion in the second quarter, reflecting growth in GCP across core and AI products at a rate that was much higher than cloud's overall revenue growth and growth in Google Workspace driven by an increase in average revenue per seat and the number of seats. Google Cloud operating income increased to $2.8 billion, with an operating margin increasing from 11.3% to 20.7%. The expansion in cloud operating margin was driven by strong revenue performance and continued efficiencies in our expense base, partially offset by higher technical infrastructure usage costs, including associated depreciation. As we ramp up 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. This growth was driven by strong demand for our products and services from both new and existing customers. As Sundar mentioned, we have signed multiple billion-dollar-plus deals in the first half of the year. Regarding our Other Bets in the second quarter, revenue was $373 million, and operating loss was $1.2 billion. Within Other Bets, we're allocating more resources to businesses like Waymo, where we see opportunities to create additional value. With respect to CapEx in the second quarter, our CapEx was $22.4 billion. The vast majority of our CapEx was invested in technical infrastructure, with approximately two-thirds of investments in servers and one-third in data centers and networking equipment. In Q2, we returned capital to shareholders through stock repurchases of $13.6 billion and dividend payments of $2.5 billion. Turning to our outlook, I would like to provide commentary on several factors that will impact our business performance in the second half of 2025, as well as an updated outlook for full-year CapEx. First, in terms of revenues, we're pleased with the overall momentum we're experiencing across the business. At current spot rates, we could see a tailwind to our revenue in Q3. However, volatility in exchange rates could affect the impact of FX on Q3 revenue. Advertising revenues in the second half of 2025 will be influenced by 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 spending on the U.S. Election in the second half of 2024, particularly on YouTube. In Cloud, the demand for our products is high, as evidenced by continued revenue growth and the cloud backlog of $106 billion. We have been working diligently to increase capacity and have improved the pace of server deployment, but we expect to remain in a tight demand-supply environment going into 2026. Moving to investments, 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 server deliveries, 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 experiencing from customers, as well as growth opportunities across the company. We will provide more details on the 2026 CapEx outlook in a future earnings call. Regarding expenses, the significant increase in our CapEx investments over the past few years will continue to pressure the P&L, particularly in the form of higher depreciation. 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 of depreciation to accelerate further in Q3. Also, we anticipate some headcount growth in 2025 in key investment areas. In the third quarter, we expect a sequential increase in total headcount additions, partly due to the hiring of new graduates. Lastly, Q3 will reflect the expense associated with the upcoming August launch of the new Pixel family of products. In conclusion, as you heard from Sundar and Philipp, we're pleased with the momentum in the business and excited about the pace of innovation. Our full stack approach, which combines AI infrastructure, AI research, and AI products and platforms, positions us well to deliver new products and services across the company. We're seeing great momentum with our efforts, as demonstrated by the increase in cumulative tokens processed. Search revenues are experiencing healthy growth, with features like AI Overviews, AI Mode, and Lens offering new ways for users to access information. Cloud has reached an annual revenue run rate of more than $50 billion and is delivering margin expansion while continuing to invest to meet customer demand. YouTube has expanded its addressable market by building new services like Shorts, which now averages over 200 billion daily views. We're excited to see the value our products and services are bringing to customers and partners around the globe. Now I'll turn it over to the operator, and Sundar, Philipp, and I will take your questions.

Maybe one for Sundar and one for Philipp. Sundar, when you think about the journey you're on with respect to the evolution of products and platforms, how do you think about some of the implications of changed consumer behavior and how investors should think about that from the volume perspective versus the monetization perspective? So I think there are a lot of long-standing dynamics about clicks and click monetization that might be very different when you look out over the next 3 to 5 years. And Philipp, when you think about the evolution of YouTube, you made a number of comments about subscription revenue. I'm just curious how you think about the mix of advertising versus subscription, and what some of your key learnings might have been as the subscription side of the business continues to scale?

Thanks, Eric. I appreciate the question. I don't think looking ahead, based on everything we are seeing, people are excited about AI. They are adopting it well across our products. For me, just in multimodality, how people have modified their behavior to include images, both through Lens and Circle to Search seamlessly as part of interacting with Google, are early indications that people will adopt these moments very well. I believe I'm trying to understand your question in terms of clicks and click monetization; maybe that’s something Philipp can touch on. Overall, we expect as we build out our organic experiences, we have a good understanding of how to continue training on monetization so that it will work well with organic experiences. But we will lead with the organic experience. In terms of newer surfaces like the Gemini app, we’ll focus on the organic experience in the near term. Just like we are doing with AI Overviews and AI Mode, over time we’ll be able to bring good commercial experiences there as well. We believe people will adapt to them as they always have. Maybe Philipp can add more.

Yes. So on your question about YouTube subscriptions versus ads, look, we love our ads business. We appreciate our subscription business. YouTube subscriptions are increasingly important, and we will continue our long-term focus here. We had strong growth across the YouTube subscription products, which include, just to be clear, YouTube TV, YouTube Music, and Premium. A common theme for our subscription services is offering viewers more choices. We also deeply understand the monetization side here, looking at where we monetize more with ads versus where we can potentially monetize more with subscriptions. We will continue this dual-tier strategy actively going forward.

One for Sundar and one for Philipp. Sundar, can you just talk about how you're thinking about your current access to compute even as you spend $10 billion more this year in CapEx? You also said that you're still in a tight supply environment, so just trying to marry those. Philipp, maybe on search growth, can you talk a little bit about Payclick and pricing growth within the 12% search growth and how we should think about volume versus monetization trends going forward?

Doug, on the CapEx stuff, we are seeing strong momentum across our portfolio, especially in Cloud. You are right; it's a tight supply environment. We are investing more to expand, but there is a time delay between when this additional investment will play out in future years. So both are true at the same time. We are planning ahead, and we are investing, but overall, it's exciting to see the traction, particularly in Cloud. The comprehensiveness of our AI portfolio and the breadth of our offerings, including our models on GPUs and TPUs for customers, has been driving demand. So we are investing to keep up with that.

And on your paid click question, look, to be clear, we manage the business to drive great outcomes for our users and an attractive ROI for our advertisers. We don’t manage to pay clicks and CPC targets. Some product and policy changes we make drive better monetization at the expense of paid clicks. You’ll see in the 10-Q that paid clicks were up 4% year-over-year. However, several factors affect these metrics from quarter-to-quarter, such as advertiser spending, product changes, policy changes, and user engagement. Avoid drawing overly broad conclusions solely based on these metrics.

I have two. First, Sundar, there's a lot of discussion about agentic search for commercial activities and agents that can be broadly deployed. From a technology perspective, what are some of the predominant technological hurdles your engineering teams are working on to launch scalable agents for commercial queries? Secondly, can you provide any updates on the internal efficiency you've seen from GenAI-enabled capabilities, as well as any friction points that need to be overcome for some of these internal tools?

Let me start with the first one on agentic capabilities. Overall, we are definitely building our series of 2.5 models, particularly with Pro. It’s the direction we are investing the most in. There's exciting progress, including the models we haven't fully released yet. The main gaps we’re trying to address involve chaining a sequence of events, as being able to execute it reliably compounds latency and cost in a measurable way. We’re constantly making progress. By looking back over a 12-month basis, we improve the models’ efficiency for every given capability. I believe the forward trajectory we're on will really unlock these agentic experiences in the coming years. I anticipate 2026 will be a pivotal year where these agentic experiences are used more broadly. Regarding the second part, as it relates to internal efficiency using GenAI, we're currently rolling out agentic coding journeys for our software engineers. It’s exciting to see significant usage emerging, particularly over the last few weeks. People are adopting it for agentic workflows and software engineering internally. A few months ago, there were many friction points, but we are overcoming them, and people are beginning to use internally on coding and other areas within the company. Exciting progress is ahead, as we approach rolling out these journeys for our users.

Sundar, I have two for you. You recently announced a partnership with Warby Parker to develop glasses. How significant do you think the cycle of new devices will be for scaling AI, and do you envision a future where these devices are essential to consumer experience? Secondly, how does Google Search with AI Mode usage differ from the Gemini stand-alone apps? Are you seeing any differences in usage or types of consumers who go to the app versus traditional search with AI?

On the first question, I believe any change in technology offers new opportunities for user experiences, devices included. AI, particularly, will enable a wave of innovation in this context. We are excited about our investment in glasses, which have taken significant strides compared to previous versions. That said, I do expect phones to remain central to the experience for the next couple of years. New emerging categories are indeed exciting. On your second question regarding AI Mode versus the Gemini stand-alone app, there are use cases where both provide excellent experiences but are very specific to their uses. AI Mode is especially effective in information-oriented inquiries, where users want reliable, accurate information. In contrast, the Gemini app allows users to have longer conversations, often exploring and engaging with the model in more informal or exploratory manners. Both functions fulfill distinct user needs.

Sundar, with the ongoing war for AI talent, how do you view Google's ability to attract and retain key AI talent? Anat, how should we think about the integration of AI-related resource costs alongside the step-up in capital investments required to build for AI?

Mark, on the first question, we have always invested heavily in AI talent for over a decade now, and I believe we have extraordinary depth and breadth in this area. Top talent often looks for opportunities to be at the forefront of technology, and our mission and access to state-of-the-art resources matter to them. We remain competitive on all fronts, continually ensuring our retention metrics and new talent coming in are healthy, despite headlines highlighting individual changes. We will persist in our commitment to invest in talent and technology needed for future opportunities.

On how we integrate this into our overall cost structure, having the full stack consists of research, our people, which are our most critical resource. We ensure we invest appropriately to have the best minds in the industry at Google driving innovation for our customers. It is part of what you're seeing in our operating expense line. We're also working diligently to offset growth in investment across the business and ensure we can allocate resources efficiently. For instance, as Sundar mentioned, we're leveraging AI tools within the company to drive efficiency in how we run operations. We maintain a high level of discipline and execution while driving efficiency throughout the organization.

If I can ask two, that would be great. The first is on Search click-through rates as a driver of monetization. You’ve done a remarkable job over the past decade in improving ad relevancy and higher CTR. As we look forward and we see lower ad impressions per SERP and all these changes with AI overviews, how do you feel about your ability to drive CTR going forward? The second question is about your collaboration with OpenAI for some aspect of cloud infrastructure. How might that relationship expand in the future?

I can address the first question. If I understood correctly, regarding AI Overviews, they continue to drive higher satisfaction and usage, scaling nicely to over 2 billion users across 200 countries. We are pleased with this development, and when it comes to monetization, we see it at roughly the same rate, which provides a solid foundation for innovation in ad formats.

Regarding the second question about OpenAI, we are enthusiastic about partnering with them on Google Cloud. Our platform is open, and we have a history of supporting great companies, startups, and AI labs. We look forward to enhancing our partnership and exploring further avenues for collaboration.

Two questions, please. First, can you describe what you see in terms of the ad environment for the back half of the year compared to last year? Does it seem as certain or uncertain as it was last year? What unusual concerns do you have for the back half? Secondly, Sundar, regarding your two surfaces approach to Search. You must have internal metrics supporting that as the most optimal way to approach the market. However, there's an argument for a unified search that discerns intent from queries, giving a material advantage over competitors. Could you elaborate on the metrics confirming the dual-surface approach?

To start, our ad business performed strongly in Q2. In Q2, Search and other performance was driven by growth across all verticals, primarily retail and financial services due to strength in insurance and health care's contribution to growth. We are only weeks into Q3, so it’s too early to comment on the back half of the year.

To your second question, our two surfaces effectively cover the breadth and depth of what can be achieved. Splitting our approach allows us to address specific user needs. Search is information-focused, while the Gemini app acts as a personal and proactive assistant. Over time, we can optimize these experiences and meet user expectations effectively. We have a history of evolving experiences, as seen with Universal Search, so we're prepared to bring these experiences together when the time is right.

Two questions, if I may. The first on Cloud, could you clarify your back half outlook? In the last quarter, you mentioned some supply constraints easing towards the end of 2025, yet you had strong acceleration in Q2. Now you're discussing supply constraints easing into 2026. Can you clarify the back half outlook for Cloud? The second question is, regarding agentic experience, does it democratize the web as Search did two decades ago, enabling discovery in the long tail, or does it lead to more concentration with a smaller group of vertical winners? What’s your opinion?

On your first question about the Cloud's second half outlook, we’re focused on bringing more capacity online. We see increases towards the end of the year as we ramp up, reflected in our ongoing value metrics. It's crucial to note that the growth rates can fluctuate due to timing, as deliverables may shift between quarters.

Regarding the agentic experience, its value lies in easing access to information and enhancing user experience, rather than just technology. We will create new opportunities, expanding use cases over time, similar to what we saw during the early web's emergence. Users will appreciate these advancements, and smart players will leverage them for growth. The balance between expanding access and ensuring effective business models for various players will be essential during this transition.

A couple for Sundar. First, it appears that the subscription businesses are tracking well. With Gemini 2.5 receiving positive reviews, how are you managing the Gemini subscriptions? Is there anything you can do to accelerate consumer subscriptions for Gemini within Google One? Secondly, regarding the course change in CapEx, your increased investment seems connected to cloud demand. What gives you confidence you will obtain good returns on that spend?

On the subscriptions, we are seeing positive traction with Google One, particularly with the introduction of AI plans. Our AI offerings, including Pro and Ultra on the 2.5 models, have contributed to a healthy quarter in that area. So we are optimistic about the future growth trajectory in subscriptions. Regarding the confidence in CapEx, we are investing because we are delivering considerable value through our cloud services. We have low churn rates and high customer satisfaction, trends that signify strong potential for good returns on our investments. The value we deliver to customers continues to grow.

Thanks, everyone, for joining us today. We look forward to speaking with you again on our third quarter 2025 call. Thank you, and have a good evening.