Earnings Call Transcript - GOOGL Q4 2025

Jim Friedland, Head of Investor Relations

Thank you for standing by for the Alphabet Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. Please go ahead. Thank you. Good afternoon, everyone, and welcome to Alphabet Fourth Quarter 2025 Earnings Conference Call.

Sundar Pichai, CEO

Thanks, Jim. Hi, everyone. Thanks for joining us. It was a tremendous quarter for Alphabet. The launch of Gemini 3 was a major milestone, and we have great momentum. Alphabet's annual revenues exceeded $400 billion for the first time. This quarter, Search continued to accelerate with revenues growing 17%. YouTube's annual revenues surpassed $60 billion across ads and subscriptions. Cloud significantly accelerated with revenues growing 48%, now on an annual run rate of over $70 billion. Backlog grew by 55% quarter over quarter to $240 billion representing a wide breadth of customers driven by demand for AI products. We have over 325 million paid subscriptions across consumer services, strong adoption for Google One and YouTube Premium. In addition, we have sold more than 8 million paid seats of Gemini Enterprise, which we launched just four months ago. And our Gemini app now has over 750 million monthly active users. We are also seeing significantly higher engagement per user, especially since the launch of Gemini 3 in December. Overall, we are seeing our AI investments and infrastructure drive revenue and growth across the board to meet customer demand and capitalize on the growing opportunities ahead of us. Our 2026 CapEx investments are anticipated to be in the range of $175 to $185 billion. Today, I'll provide an update on our AI progress and then share highlights from Search, Cloud, YouTube, and Waymo. First, AI progress across the full stack. Our unrivaled infrastructure serves as the bedrock of our AI stack. We have the industry's widest variety of compute options. That includes GPUs from our partner NVIDIA, who announced at CES that we'll be among the first to offer their latest Vera Rubin GPU platform. Plus, our own TPUs that we have been developing for a decade. In December, we announced our intent to acquire Intersect, which provides data center and energy infrastructure solutions. As we scale, we are getting dramatically more efficient. We were able to lower Gemini serving unit costs by 78% over 2025 through model optimizations, efficiency, and utilization improvements... Next, world-class AI research including models and tooling. We offer the most extensive model portfolio in the world and lead across text, vision, and image-to-video LM Arena leaderboards. Gemini 3 Pro drives the state of the art in reasoning and multimodal understanding. It has seen the fastest adoption of any model in our history. Since launch, Gemini 3 Pro has consistently processed three times as many daily tokens on average as 2.5 Pro. Our latest model powers Google Anti Gravity, our new development platform where agents can autonomously plan and execute complex software tasks. It already has more than 1.5 million weekly users after launching just over two months ago. Our first-party models like Gemini now process over 10 billion tokens per minute via direct API used by our customers, up from 7 billion last quarter... Next, bringing AI to our products and platforms. We are shipping innovation at scale to bring helpful AI features to people everywhere. In January alone, we launched personal intelligence in AI mode in search and the Gemini app. We introduced new features to Gmail and updated Vio. We reimagined Chrome as an AI-first agentic browser through features like Chrome Autobrowse. Announced Project Genie, which lets users create and explore interactive worlds generated in real-time using Genie 3, our general-purpose world model. And we laid the groundwork for shopping in the AI era by introducing a new open standard for agentic commerce. The Universal Commerce Protocol, built alongside many retail industry leaders. Finally, from Android to Pixel, we are getting our best AI capabilities into people's hands. At CES, a range of partners, including Samsung, showcased how they are bringing Gemini to more devices from XR to the living room and beyond. And to confirm the rumors, we will be introducing our Pixel 10a to our best-ever rated Pixel 10 series very soon. Turning now to key highlights from the quarter, starting with Search. Search saw more usage in Q4 than ever before, as AI continues to drive an expansionary momentum. We executed with incredible speed. We shipped over 250 product launches within AI mode and AI overviews just last quarter. We integrated Gemini 3 directly into AI mode and search. Now Search can better understand your query, dive deeper on the web, and generate interactive UI experiences. And last week, we upgraded AI overviews to Gemini 3, giving users a best-in-class AI response at the top of the search results page. We also made the search experience more cohesive, ensuring the transition from an AI overview to a conversation in AI mode is completely seamless. These new experiences are proving to be more helpful and are driving greater usage. A few highlights: first, once people start using these new experiences, they use them more. In the US, we saw daily AI mode queries per user double since launch, and AI overviews continue to perform very well. Second, people are engaging in longer, more complex sessions. Queries in AI mode are three times longer than traditional searches. We are also seeing sessions become more conversational, with a significant portion of queries in AI mode now leading to a follow-up question. Third, people are searching in new ways beyond text. Nearly one in six AI mode queries are now non-text, using voice or images. And Circle to Search is now available on over 580 million Android devices. Next, Google Cloud. Our growth in revenue, operating margin, and backlog highlights the strength of our entire portfolio. One, we are winning more new customers faster. We exited the year with double the new customer velocity compared to Q1. Two, we are also signing larger customer commitments. The number of deals in 2025 over $1 billion surpassed the previous three years combined. And three, we continue to deepen our relationships with existing customers who are outpacing their initial commitments by over 30%. Nearly 75% of Google Cloud customers have used our vertically optimized AI, from chips to models to AI platforms and enterprise AI agents, which offer superior performance, quality, security, and cost efficiency. These AI customers use 1.8 times as many products as those who do not, enabling us to diversify our product portfolio, deepen customer relationships, and accelerate revenue growth... Our product line has multiple monetization levers spanning infrastructure, platform, and high-margin AI-powered products and services, with 14 product lines each exceeding $1 billion in annual revenue. We offer leading infrastructure for AI training and inference to our cloud customers. With the industry's widest variety of compute options, from our own seventh-generation Ironwood TPU to the latest NVIDIA GPUs. Our ten-year track record in building our own accelerators with expertise in chips, systems, networking, and software translates to leading power and performance efficiency for large-scale inference and training. Our Cloud AI accelerators serve the leading frontier AI labs, capital markets firms, enterprises, and governments for high-performance computing applications. We also offer our leading generative AI models including Gemini, Imagine, Vio, Chirp, and Liria to cloud customers. In December alone, nearly 350 customers each processed more than 100 billion tokens. In Q4, revenue from products built on our generative AI models grew nearly 400% year over year, significantly accelerating from the prior quarter. Today, more than 120,000 enterprises use Gemini, including AI unicorns and global enterprises. 95% of the top 20 and over 80% of the top 100 SaaS companies use Gemini, including sales and Shopify. Gemini is becoming the AI engine for the world's most successful software companies... Leading enterprises are also driving strong demand for our enterprise AI agents. We have sold more than 8 million paid seats of Gemini Enterprise, our enterprise AI platform, to more than 2,800 companies including major brands. To streamline knowledge management and automate processes. Gemini Enterprise managed over 5 billion customer interactions in Q4, growing 65% year over year. For customers, including major retail brands. Our integration of Gemini and Google Works is driving wins with global brands and public sector organizations. We are also seeing momentum with independent software vendors. Revenue from AI solutions built by our partners increased nearly 300% year over year, and commitments from our top software partners grew more than 16x year over year. Before moving on, I'm pleased that we are collaborating with Apple as their preferred cloud provider and to develop the next generation of Apple Foundation models based on Gemini technology. Up next, YouTube. I want to highlight four points. First, streaming. In the living room, YouTube continues to be the number one streamer in the US for nearly three years. From the NFL to Coachella, YouTube is where people watch today's biggest popular culture moments unfold. Second, subscriptions. We continue to see strong subscription revenue growth across YouTube, particularly YouTube Music Premium. We'll soon launch new YouTube TV plans bringing more choice and flexibility to subscribers. The NFL has seen strong NFL Sunday Ticket subscriber growth with YouTube, with the highest paid subscriber number ever in the history of the product... Third, podcast. To illustrate YouTube's popularity, in October 2025, viewers watched over 700 million hours of podcasts on living room devices, up 75% from just a year prior. And fourth, AI is transforming the YouTube experience for both creators and viewers. On average, every day in December, over 1 million channels used our new AI creation tools to supercharge their creativity. During that same month, more than 20 million viewers used our new tool powered by Gemini to learn more about the content they watched. And finally, Waymo. This week, Waymo raised its largest investment round to date and is well positioned to continue its momentum with safety at the core. In December, we surpassed 20 million fully autonomous trips and are now providing more than 400,000 rides every week. Waymo continues to expand its service territory, launching in multiple cities across the US, UK, and Japan. The team has made incredible progress on important capabilities, including opening up public service to airports and freeways. In closing, 2025 was a fantastic year for the company a big thanks to our employees and partners worldwide. We are really well positioned going into 2026.

Philip Schindler, CRO

Thanks, Sundar, and hello, everyone. I'll cover performance for Google services for the quarter, then structure the rest of my remarks around the great progress we're delivering across search, YouTube, and partnerships. Google services revenues were $96 billion for the quarter, up 14% year on year, primarily driven by accelerated growth in search. Adding some further color to our results, the 17% increase in search and other was led by broad strength across all major verticals, with retail particularly strong. On YouTube, the 9% growth in advertising revenues was driven by direct response. Network advertising revenues were down 2% year on year this quarter. Starting with Search and Other revenues, which delivered over $63 billion in revenue for the quarter. Sundar mentioned the expansionary moment for Search. The same is true for ads... We're investing in AI to drive significant improvements across all areas of marketing. We're expanding the entire playing field that advertisers can compete on. AI gives businesses the ability to reach more customers in more places than ever before. Gemini uniquely positions us to bring the transformational benefits of AI to ads in three critical areas for our customers: Ads quality, advertiser tools, and new AI user experiences. First, ads quality. We've been deploying Gemini models to improve query understanding at a rate of almost a launch per month for the last two years. These improvements drive better query matching, ranking, and quality, making search ads even more effective. With Gemini across our ads quality stack, we evaluate relevance with greater accuracy than with previous generations of models. This has significantly improved our ability to systematically deliver more helpful high-quality ads, contributing to a meaningful reduction in irrelevant ads served. Gemini's understanding of intent has increased our ability to deliver ads on longer, more complex searches that were previously challenging to monetize. Second, we're building more agentic actions into our advertiser tools. Businesses can now leverage Gemini in conversational experiences within ads and analytics to identify and run recommendations such as generating new campaigns. Advertisers use Gemini as a real-time partner to assemble creatives. In Q4 alone, they used Gemini to create nearly 70 million creative assets via text customization in AI Max and PMax. For instance, Aritzia, Canada's premier fashion house, used AI Max to find new high-value customers that traditional strategies miss, delivering an 80% incremental uplift in conversion value for Q4. L'Oreal, one of the first alpha testers, used AI Max 2025 across 800 unique campaigns in 23 countries and 30 brands. AI Max enabled the L'Oreal Group to maximize its presence across the full consumer journey, fuel its consumer growth, and increase revenue for DTC brands like Nick's by 23%. The third area is how we monetize new AI user experiences in search. We have significantly increased our focus on AI mode and are in the early stages experimenting with AI mode monetization, like testing ads below the AI response, with more underway. For example, we announced direct offers in a new Google Ads pilot, which will allow advertisers to show exclusive offers for shoppers who are ready to buy directly in AI mode. This new type of sponsored content uses AI to match the right offer provided by the retailer to the right user. As Sundar mentioned, we are building the era of agenda commerce and working with partners to introduce the universal commerce protocol in our consumer products and across the web. We've received tremendous feedback from the industry. Soon, people can use a new checkout experience to buy directly in AI mode in Gemini from select merchants.

Sundar Pichai, CEO

Turning now to YouTube, which remains the number one streamer in the US for nearly three years according to Nielsen. YouTube creators are providing an unmatched breadth of content. Our investment in AI innovation across creativity, viewing experience, and monetization continues to pay off. We're seeing strong traction in our subscription business, innovating to meet consumers where they are. We added a new sports tier for YouTube TV at a lower price point. YouTube Premium Lite is proving to be a popular choice. And we continue to deliver strong year-on-year growth across YouTube subscriptions, particularly YouTube Music and Premium. Looking at monetization across YouTube, momentum continues in Shorts and the living room. Shorts now averages over 200 billion daily views...

Anat Ashkenazi, CFO

Thank you, Philip. My comments will focus on year-over-year comparisons for the fourth quarter unless I state otherwise. I will start with results at the Alphabet level and will then cover segment results. I'll end with some commentary on our outlook for the first quarter and full year 2026. 2025 was a strong year of innovation and execution for Alphabet. These efforts, combined with our investments in AI, drove meaningful results across the business. For the full year 2025, Alphabet consolidated revenues were $403 billion, up 15% on a reported and constant currency basis. Moving to Q4 performance, we delivered strong growth in the fourth quarter. Consolidated revenues reached $113.8 billion, up 818%, or 17% in constant currency and driven by an acceleration in Search and Cloud revenues. Turning to costs and expenses. We reported a $2.1 billion stock-based compensation charge due to an increase in Waymo's valuation related to the investment round that was announced on Monday. The vast majority of the charge was reflected in R&D expenses. Total cost of revenue was $45.8 billion, up 13%. Tech was $16.6 billion, up 12%. Other cost of revenues was $29.2 billion, up 13%, with the increase primarily driven by depreciation associated with the deployment of our technical infrastructure, content acquisition costs largely for YouTube, and other technical infrastructure operations costs. Total operating expenses were up 29% to $32.1 billion. R&D expense increased by 42% driven by compensation and depreciation. The increase in compensation was due to the Waymo charge and investment in AI talent. Sales and marketing expenses were up 12%, primarily driven by marketing investments to support the Gemini app and search. G&A expenses increased 21%, primarily due to a shift in timing of our charitable contributions. Operating income increased 16% to $35.9 billion and operating margin was 31.6%. Both operating income and operating margin were negatively impacted by the $2.1 billion Waymo charge in the quarter. Other income and expenses were $3.2 billion, primarily due to unrealized gains in our non-marketable equity securities portfolio. Net income increased 30% to $34.5 billion and earnings per share increased 31% to $2.82. We generated record operating cash flow of $52.4 billion in the fourth quarter and $160.5 billion for the full year. This translated into $24.6 billion of free cash flow in the fourth quarter and $73.3 billion for the full year. We ended the quarter with $120.8 billion in cash and marketable securities and $46.5 billion in long-term debt. Turning to segment results. Google services revenues increased 14% to $95.9 billion, reflecting strong growth in search and subscriptions. Google Search and other advertising revenues increased by 17% to $63.1 billion, representing another strong quarter with continued growth across all major verticals, with the largest contribution from retail. YouTube advertising revenues increased 9% to $11.4 billion driven by direct response advertising. Results were negatively affected from the lapping of the strong spend on U.S. Election in 2024 that we've mentioned on previous earnings calls. Network advertising revenues of $7.8 billion were down 2%. Subscription, platforms, and devices revenues increased 17% this quarter to $13.6 billion due to strong growth in YouTube subscriptions, particularly YouTube Music and Premium and growth in Google One, benefited from increased demand for AI plans. Google services operating income increased 22% to $40.1 billion, and operating margin was 41.9%. The Google Cloud segment delivered outstanding results in the fourth quarter as the business continued to benefit from strong demand for enterprise AI products. Cloud revenue accelerated meaningfully and was up 48% to $17.7 billion. Revenues were driven by strong performance in GCP, which continued to grow at a rate that was much higher than cloud's overall revenue growth rate. As Sundar noted, we're driving performance through strong growth in the win rate of new customers, signing larger customer commitments, and increasing spend with existing customers... GCP's performance was driven by accelerating growth in enterprise AI products, which are generating billions in quarterly revenues. We had strong growth in both enterprise AI infrastructure driven by deployment of TPUs and GPUs and enterprise AI solutions which benefited from demand for industry-leading models, including Gemini 3. Core GCP was also a meaningful contributor to growth due to strong demand for infrastructure and other services, such as cybersecurity and data analytics. We also had double-digit growth in Workspace, driven by an increase in average revenue per seat and the number of seats. Cloud operating income was $5.3 billion, more than doubling year over year, and operating margin increased from 17.5% in the fourth quarter of last year to 30.1%. Google Cloud's backlog increased 55% sequentially and more than doubled year over year, reaching $240 billion at the end of the fourth quarter... The increase in backlog was driven by strong demand for our cloud products led by our enterprise AI offerings from multiple customers. In Other Bets revenues were $370 million, and operating loss was $3.6 billion reflecting the $2.1 billion Waymo charge I mentioned earlier. We allocate resources in Other Bets to businesses like Waymo where we see meaningful opportunities to create value. Alphabet funded a significant portion of the $16 billion investment round that Waymo announced on Monday, which will allow the business to accelerate its global expansion. CapEx was $27.9 billion for the fourth quarter and $91.4 billion for the full year, in line with our expectations. The vast majority of our CapEx was invested in technical infrastructure, approximately 60% of that investment in servers and 40% in data centers and networking equipment. In Q4, we returned capital to shareholders through $5.5 billion share repurchase and $2.5 billion of dividend payments. Turning to our outlook, I would like to provide some commentary on factors that will impact our business performance in the first quarter and full year 2026. First, in terms of revenues, we're pleased with the overall momentum of the business. At current spot rates, we would expect to see an FX tailwind to our consolidated revenues in Q1. However, the volatility in exchange rates could affect the impact of FX on Q1 revenues. In Google services, we expect growth to be driven by ongoing improvements in the user experience as well as improved ROI for advertisers, keeping in mind the normal seasonal pattern for advertising revenue... In Google Cloud, we're seeing significant demand for our products and services, which we expect to continue to drive strong growth despite the tight supply environment we're operating in. Moving to investments. The investments we have been making in AI are already translating into strong performance across the business as you've seen in our financial results. Our successful execution coupled with strong performance reinforces our conviction to make the investments required to further capitalize on the AI opportunity. For the full year 2026, we expect CapEx to be in the range of $175 billion to $185 billion with investments ramping over the course of the year. We're investing in AI compute capacity to support frontier model development by Google DeepMind, ongoing efforts to improve the user experience, and drive higher advertiser ROI in Google services, significant cloud customer demand, as well as strategic investments in Other Bets. Keep in mind that the availability of supply, pricing of components, and timing of cash payments can cause some variability in the reported CapEx number. In terms of expenses, as we've discussed on previous calls, the significant increase in our investments in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expense and related data center operations costs such as energy. In 2025, depreciation increased by nearly $6 billion or 38% from $15.3 billion in 2024 to $21.1 billion in 2025. Given the increase in our CapEx investments in recent years, we expect the growth rate in 2026 depreciation to accelerate in Q1 and meaningfully increase for the full year. We're also planning to continue hiring in key investment areas such as AI and cloud. In 2025, our teams delivered amazing innovation, executing with a high level of discipline and velocity. These efforts provide great experiences for consumers and outstanding performance for creators, partners, and enterprise customers, driving strong revenue growth. I want to take this opportunity to thank our employees for their contribution to this impressive performance. Now Sundar, Philip, and I will take your questions.

Jim Friedland, Head of Investor Relations

Thank you. As a reminder, to ask a question, you will need to press star one. Your first question comes from Brian Nowak with Morgan Stanley. Your line is now open.

Brian Nowak, Analyst

Thanks for taking my questions. I have two, one on AgenTeq. One on YouTube. The first one on AgenTek, Sundar, I'd be curious to hear about you look back at 2025, do you think you made the most progress on new types of agentic commerce products? And then looking into '26, are you most optimistic to sort of have even more progress in utility for users and your advertisers? And the second one is on YouTube. You know, we've seen a lot of the new content creation models like Genie, etcetera. Walk us through sort of the alphabet long term vision for how Genie and some of these content creation tools will be integrated into YouTube over time?

Sundar Pichai, CEO

Great. Thanks, Brian. First, maybe I'll take the agentic part first. I definitely think '25 was more about laying the foundation getting the models to start being more robust in agentic use cases. Obviously, coding is an area where progress was felt most in areas like commerce. I think we spent the year working with the ecosystem to develop the underlying protocol that's going to be needed for this agentic world. So I think the launch of the Universal Commerce protocol at NRF in January with a bunch of founding partners has been super well received. I'm excited now that we've laid the foundation for interoperability on which agentic commerce can work. And now we are integrating those experiences into Gemini AI mode and so on. So I think this is the year where you will see consumers actually being able to use all of this, and I'm excited about the opportunity ahead. On YouTube, look, I'm super excited by Genie and blown away by how much time people are spending creating these incredible worlds. I think it's going to have a wide level of applicability. I think an area where we shine in general is multimodality and representing the real world. I think Genie is a further step in that direction in terms of building world models. All the innovations we are doing, be it our Imagine, Vio, Liria, Genie, all that work we bring into our products and to our cloud customers. YouTube is going to be a natural place for creators. We are going to keep incorporating these tools; already creators are responding by adopting these, but we do want to put creators at the center of the experience, which is very important to us. So for us, making sure YouTube is a voice for creator expression is the foundation by which we will approach this.

Jim Friedland, Head of Investor Relations

Your next question comes from Eric Sheridan with Goldman Sachs. Your line is now open.

Eric Sheridan, Analyst

Thanks so much for taking the question. Two, if I could. Over the last couple of earnings calls, we've talked a lot about imbalances between demand and capacity for AI, both internally and externally. With the step function change in CapEx dollars you're projecting now in 2026, can you talk about the pathway to closing the gaps for the need for compute both internally and externally, and how to think about some of the outputs of closing that gap? And again, the second part would be against that level of spend that you're now projecting for '26. How do you think about continuing to find operating efficiencies inside the business to fund those investment growth investments as well? Thank you.

Sundar Pichai, CEO

Thanks, Eric. You are right. We've been supply constrained even as we've been ramping up our capacity. Obviously, CapEx for this year is an eye towards the future. You have to keep in mind some of the time horizons are increasing in the supply chain, etc. So we are constantly planning for the long term and working towards that. Obviously, how we close the gap this year is a function of what we have done in the prior years. There's that time delay to keep in mind. I expect the demand we are seeing across the board for what we need to invest for future work for Google DeepMind, as well as for the cloud, is exceptionally strong. So I do anticipate going through the year in a supply-constrained way. Perhaps Anat can touch on the second part.

Anat Ashkenazi, CFO

Sure. Thanks, Eric, for the question. As I've mentioned on one of the previous earnings calls, our approach to how we look at efficiency and productivity is not just episodic or a one-time project, but rather how we run the business on a regular basis and always seek additional opportunities to drive efficiency across the organization. With the demand we're seeing, whether from external customers or across the organization, the more capital we can free up within the organization to invest, the better we can turn this flywheel of making investments to drive future growth. We're doing this across the organization. Whether it's within our technical infrastructure, certainly when we invest at these amounts, we look at how we can ensure that we are the most efficient with every dollar that goes towards our technical infrastructure. There are scientific innovations that are part of that process. Technical innovation is also how we primarily focus on constructing our own data centers. We do partner with some external parties on a lease occasionally, but most of our data centers we construct ourselves, ensuring we do it in the most efficient way that matches our workloads and needs. We also look at coding productivity that Sundar mentioned in the past, about 50% of our code is written by agents, which is then reviewed by our engineers. But certainly, it helps our engineers do more and move faster with the current footprint of the organization. We evaluate opportunities across the business regularly to free up more of that capacity to invest in our future.

Jim Friedland, Head of Investor Relations

Your next question comes from Doug Anmuth with JPMorgan. Your line is now open.

Doug Anmuth, Analyst

Thanks for taking questions. I have two. Over the last couple of years, we've seen considerable large language model leapfrogging, and many that continue. What are the ways that Google can build and maintain its Gemini position around data and distribution and product integration? And then how should we think about the potential for TPUs to move outside of Google Cloud and into external data centers and develop as an incremental revenue stream? Thank you.

Sundar Pichai, CEO

Doug, look, I think you know the large language model frontier has been an exciting trajectory, and I think 2026 will continue to show that progress. We're obviously improving these models across many paradigms such as pre-training, post-training, test time compute, etc. and we are bringing multimodal models into the picture with agentic capabilities. The coding area is showing a lot of progress. Integrating all of this together and offering a great customer experience through our products as well as through our APIs to our Cloud customers feels like there's a lot of headroom ahead. As you've seen, our trajectory over the past two years in terms of how we've been making progress, we are in a very, very relentless innovation cadence. I am confident about maintaining that momentum as we go through 2026. In terms of TPUs, I would think about it as part of what makes Google Cloud an attractive choice is the wide choice of accelerators we bring. We meet customers in terms of their needs and the choice as well as other things we include as part of Google Cloud. The end-to-end efficiencies in our data centers all come to bear. That reflects what we see in the momentum in Google Cloud. Given the overall investment we are making, we expect to drive momentum there. That's how I would think about it.

Jim Friedland, Head of Investor Relations

Your next question comes from Mark Mahaney with Evercore. Your line is now open.

Mark Mahaney, Analyst

Thanks. Two questions. One, could you just comment a little bit on the YouTube ad revenue, that 9% year-over-year growth? It sounded like Direct Response was good, and it seemed from search that retail came in relatively strong. It's a little surprising that didn't kind of come through in the YouTube ads revenue growth. And then, Sundar, can I ask you to try to get ahead of a debate in the market, which is kind of maybe at a deep seek moment again? You talked earlier about Jim and I being the AI engine for some of the most successful software SaaS companies out there in the world, and there seems to be a market belief that these software companies are kind of losing seat power and pricing power. It looks like it'd be a really terrible customer base. I can't imagine that that's actually going to happen. But could you just talk about it? You're at the forefront of AI and the impact that it's having on software companies. Why wouldn't that be, or why would it be undermining the economics of your large software SaaS company base? Thanks.

Philip Schindler, CRO

So, Mark, so first of all, thank you for the question. For the full year 2025, our YouTube's annual revenue surpassed $60 billion across ads and subscriptions. In Q4, YouTube ads was driven indeed by strong growth in Direct Response. On the brand side, as Anat shared, the largest factor negatively impacting the year-over-year growth rate was lapping the strong spend on U.S. Elections. We also saw a slight impact in other brand-related verticals. But taking a step back, I think it's important to think about YouTube ads and subs holistically. When a user shifts from being an ad-supported user to a YouTube Music and Premium customer, it has a slightly negative impact on YouTube ads revenues but a positive impact on our bottom line. We had strong revenue growth in YouTube subscriptions this quarter, particularly in the YouTube Music and Premium category. Maybe the interesting part is what we're actually excited about is our roadmap and brand, the opportunity on connected TVs, and more innovative ad formats. For example, the shoppable mastheads I spoke about earlier that we piloted during Cyber five. We're working really hard to further connect brands and creators, scale sponsorships, and enable advertisers to showcase their products and services during high-visibility spotlight moments. We're also focused on expanding our creator partnership hub, making it easier for brands to find creators and develop campaigns. This holiday season, brands like JCPenney, Old Navy, and Target worked with creators for their holiday campaigns. Mattel partnered with eight top YouTube creators to reach families during the peak holiday shopping season in a campaign that helped drive a 25% increase in search volume for UNO.

Sundar Pichai, CEO

And on the Gemini adoption and what this moment means for SaaS companies. Look, at least from my vantage point, I see we have very, very good SaaS customers who are leaders in their respective categories. The successful companies are definitely incorporating Gemini deeply into critical workflows, be it improving their product experience and driving growth or using it to drive efficiency within their organizations. I think it is an enabling tool, just like it has been for us across our products and services, be it Search, YouTube, etc. The companies that are seizing this moment also have the same opportunity ahead. We are excited about the partnerships we have there and the momentum regarding token usage, etc. The growth has been very robust.

Jim Friedland, Head of Investor Relations

Your next question comes from Mark Shmulik with AllianceBernstein. Your line is now open.

Mark Shmulik, Analyst

Yes. Thanks for taking the questions. Two, if I may. The first for Anat is, can you talk a little bit more about the relationship between investment levels and how you kind of expect core performance to trend? Is there an operating income or a free cash flow objective that you solve towards, or how do you think about greenlighting resources and projects? And then the second question for all of you, you know, a year ago, we probably could have guessed the answer to this question. Given where we are today, for each of you, what keeps you up at night here as you think about the Google story and what's next? Thanks.

Anat Ashkenazi, CFO

Thanks, Mark. Let me start with a question on the investment framework. It's an important one and as you can imagine, an important one for us as well. We have a highly rigorous framework that we use internally, where we look at all the needs for investment, whether from our own organization or from external customers, and have an estimate of what that investment could potentially yield, obviously not just near term but long term as well. We take that into consideration when we make decisions. The first is the total investment we make across the company. This was, for example, in 2025, the $91 billion we invested in CapEx and our estimate for CapEx investment this year. So what's the total envelope that we want to invest to ensure that we can drive both near-term and long-term growth for the company? The second way we use that framework is to allocate these funds across the organization, determining where we should make these investments. Throughout the year, as you can imagine, we always look to understand where things are moving, whether it's external dynamics or internal dynamics. I've mentioned some of the supply chain pressures we're seeing externally. We look at this with a highly rigorous framework to make sure that we are making the right decisions. It was exciting to see the fact that we're already monetizing, and you saw it in the results that we've just issued this quarter, the investments that we've made in AI are already delivering results across the business. I know in cloud, it's very obvious externally, but you've heard the comments on the success we're seeing in search, the comments from Sundar and Philip, and the frontier model development that serves as the foundation for the organization.

Sundar Pichai, CEO

In response to what keeps us up at night. Overall, we've been on this AI-first trajectory for over a decade, and it's what we've been methodically thinking our way through. We've been investing in TPUs for over a decade, as an example. Specifically at this moment, maybe the top question is around capacity, all constraints, whether it be power, land, supply chain issues. How do we ramp up to meet the extraordinary demand for this moment? Getting our investments right for the long term while driving efficiencies and doing it all in a world-class way is something I'm focused on.

Jim Friedland, Head of Investor Relations

Your next question comes from Michael Nathanson with MoffettNathanson. Your line is now open.

Michael Nathanson, Analyst

Thanks. I have one for Sundar and one for Anat. Sundar, you mentioned the Universal Commerce Protocol a bunch of times. I wonder if you could spend some time talking about the rationale for developing it, the opportunity that you see it solves, what it means for the product discovery funnel for consumers, and for not any color you can provide on a CapEx guide between longer-duration assets like buildings and infrastructure and shorter cycle assets like technical equipment. That'd be helpful. Thanks.

Sundar Pichai, CEO

Thanks, Michael. People go through a lot of commercial journeys across many of our surfaces, including search, YouTube, Gemini app, and so on. The opportunity to improve the experience can create a significant foundational uplift here, so we are approaching it keeping in mind our users as well as merchants. The value part of what's been good in designing the Universal Commerce Protocol is it makes it much easier for users to complete transactions while allowing merchants to help showcase a range of their offerings, including promotions. So all of that is built into the protocol. I think you have to get that value proposition for the ecosystem right to make the experience better overall. We're implementing the protocols and making progress in our Gemini models with agentic capabilities. I'm excited about a future where, as people are going through discovery, searching for new things, they can act upon them seamlessly. Overall, it creates an expansionary moment.

Anat Ashkenazi, CFO

Regarding your question about CapEx and the components making up the total amount we've announced for this year and last year, approximately 60% of our investment in 2025—this will be fairly similar in 2026—went towards machines, such as servers. Then 40% is what you referred to as long-duration assets, which include our data centers and networking equipment. The depreciation of long-term assets can be over 40 years or longer, while other shorter-duration components may depreciate sooner. We've also commented on the allocation of our ML compute across the business, with just over half of our ML compute expected to go towards the cloud business in 2026.

Jim Friedland, Head of Investor Relations

Your next question comes from Ross Sandler with Barclays. Your line is now open.

Ross Sandler, Analyst

Great. Just a question on the native Gemini. So we added 100 million MAUs in the fourth quarter. Could you just talk high level about usage and retention of native Gemini? Is this metric the right way to measure your progress against companies like ChatGPT, or is there another cohort of users that aren't included in the MAU metric that we should also consider? Thanks a lot.

Sundar Pichai, CEO

We definitely saw an extraordinary period of growth in Q4 for the Gemini app. It's not just the growth in monthly active users but a sharp increase in engagement per user on the app. All the metrics, including active usage, intensity of usage, and retention, showed distinct progress across multiple platforms and geographies. Metrics like retention and engagement are positive indicators of continued growth. The progress stemming from product experience improvements, including the introduction of Gemini 3 in AI mode, was a great driver. We'll continue to invest in evolving these experiences to harness the growth we are witnessing.

Jim Friedland, Head of Investor Relations

Your next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.

Ken Gawrelski, Analyst

Thank you very much. Two, if I may, both on search. First, could you walk us through how you are evolving your views on the monetization of AI search activity, given the more conversational nature and longer periods of engagement per session? Consumer utility is increasingly driven by the on-platform results, not specifically the link outs and referrals. In that construct, how do you think about increasing the revenue opportunity to match the consumer utility? Is this increasingly where premium subscriptions come into play? Secondly, as you think about partnerships such as the new Apple partnership on Siri, how do you think about aligning for success with those partners? Previously, as disclosed in the DOJ documents, it was a revenue-share relationship, but now, with AI search utility and through Gemini on those platforms, it may be less related to actual search revenue. Could you just talk a bit about how you align with partners for success there? Thank you.

Philip Schindler, CRO

First, it may be worthwhile to say that the acceleration we saw in search was not due to a single driver but was really the result of many different parts of our business showing strength and working well together. The vertical perspective of retail, finance, and health drove much of the contribution to search. To answer your question, the ongoing innovation is helping grow revenues. Core to what we do and the enhancements to the user and advertiser experience really continue to drive our performance. We make hundreds of these changes every quarter. AR overviews and AR mode are continuing to drive greater search usage and growth in overall queries, including critical commercial queries. Gemini-based improvements in search ads help us better match queries and craft creatives for our advertisers. I talked about understanding intent and how this has significantly expanded our ability to deliver ads on longer and more complex searches that were previously difficult to monetize. AI Max, for example, is already being used by hundreds of advertisers and continues to unlock billions of net new queries. So we're pleased with what we're seeing here.

Jim Friedland, Head of Investor Relations

And our last question comes from Justin Post with Bank of America. Your line is now open.

Justin Post, Analyst

Great. Just want to follow up on the Gemini app. Obviously, great growth there. Are you seeing any cannibalization of search as far as that activity as people start using that app more? And then second, on monetization, where are you on that? With AgenTic and other ads coming, could that be incremental to your growth over the next few years? Thank you.

Sundar Pichai, CEO

Right now, overall, I think we are giving people choice. People are using Search and experiencing AI overviews as part of it, along with the Gemini app as well. The combination of all of that, I think, creates an expansionary moment. I think it’s expanding the type of queries people do with Google overall. Overall, we have not seen any evidence of cannibalization. Perhaps Philip can comment on the monetization.

Philip Schindler, CRO

Sundar previously commented on how we think about AgenTic. In general, as with all our products, we focus first and foremost on creating a great user experience. We're excited about where we are with the ads and AI overviews, including early experiments in AI mode, such as innovations like direct offers and our roadmap for the future. Right now, we are focused on a free tier and subscriptions for the Gemini app and seeing great growth. As always, ads can be valuable and helpful commercial information and should be done in a way that respects user experience. We'll share any plans in due time, but we're not rushing anything here.

Jim Friedland, Head of Investor Relations

Thank you. This concludes our earnings call. Thank you again for your participation. We look forward to speaking with you on our first quarter 2026 call.

Operator, Operator

Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.