Dont know if any interest on this, but i find the unfolding of the AI story fascinating.

GOOGL Q1 25

Solid result. Search continues to surprise, no real discernible impact from Chat GPT after two years in operation. Search still grows. Cloud demand still ahead of the ability to supply. GOOG gave several examples of use cases by various companies across a range of efficiency measures and revenue generation. A huge runway appears here. Group Revenues up 14% cc yoy.

Margins continue to go higher for Cloud and Google services, both records. Although perhaps we are yet to see the full force of investment costs, infrastructure and search queries.

Interesting points

Although GOOG believes they have the best model, Gemini v Chat GPT, the former is lagging in consumer sales. GOOG believes they will shrink the gap, but it appears the commercial side, integrating Gemini AI into client companies through customised use cases, is the main driver and big biz.

GOOG appears with a suck it and see approach in Search. Many innovations, AI overview, Lens, Circle to search, with more coming and will follow where the user wants to go.

Some of the margin improvement is due to the declining Network biz. That is where GOOG makes a monopolistic market between web demand and supply (advertisers and websites). TAC is high here so margins are low. Interesting that this declining biz is a major regulatory focus.

Ongoing risk is macro, as GOOG is advertising-based, but note that they will not be the first to feel any slowdown. Secondly, the spend is ongoing, no change to capex. Having said that, a large chunk of capex is in the cloud and appears to be generating large use cases, which is promising. The cost increases to generate the same revenues or slightly better revenues in search are yet to play out but at this stage look manageable.

Regulatory risks abound. These will likely take years to play out. My base case is not much change here, but potentially the AAPL agreement gets banned. Note AAPL joined GOOG as a defendant. I would be worried if I was AAPL as well, $20b pa is nothing to sneeze at, even for AAPL.

Discl -Hold and have bought at $153/158 recently.

Below is a truncated results call, my bold highlights

Sundar Pichai CEO

We continue to see healthy growth and momentum across the business, including AI powering new features. In Search, we saw continued double-digit revenue growth. AI Overviews is going very well with over 1.5 billion users per month, and we are excited by the early positive reaction to AI mode.

In Subscriptions, we surpassed 270 million paid subscriptions with YouTube and Google One as key drivers. And Cloud grew rapidly with significant demand for our solutions, and you saw our leadership in AI at Cloud Next across infrastructure, agents and more. Our differentiated full-stack approach to AI continues to be central to our growth.

This quarter was super exciting as we rolled out Gemini 2.5, our most intelligent AI model, which is achieving breakthroughs in performance and it's widely recognised as the best model in the industry. That's an extraordinary foundation for our future innovation, and we are focused on bringing this to people and customers everywhere.

The elements of the AI stack I've previously mentioned are AI Infrastructure, World Class Research, including models and tooling and our Products and Platforms.

1. AI Infrastructure, -over 2 million miles of fibre and 33 subsea cables. Complementing this, we offer the industry's widest range of TPUs and GPUs and continue to invest in next-generation capabilities. Ironwood, our seventh-generation TPU and most powerful to-date, is the first designed specifically for inference at scale.

2. World Class Research, including our industry leading models. We released Gemini 2.5 Pro last month, receiving extremely positive feedback from both developers and consumers.--Active users in AI Studio and Gemini API have grown over 200% since the beginning of the year.

Turning to Open Models, we launched Gemma 3 last month delivering state-of-the-art performance for its size. Gemma models have been downloaded more than 140 million times. Lastly, we are developing AI models in new areas..eg new Gemini Robotics Models. And in health, we launched AI Co-Scientist, a multi-agent AI research system, while AlphaFold has now been used by over 2.5 million researchers.

3. Products and Platforms. All 15 of our products with a 0.5 billion users now use Gemini models.

Search. AI Overviews, which now has more than 1.5 billion users every month. Nearly a year after we launched AI Overviews in the US, we continue to see that usage growth is increasing as people learn that Search is more useful for more of their queries.

Building on the positive feedback for AI Overviews, in March we released AI Mode, an experiment in labs. It expands what AI Overviews can do with more advanced reasoning, thinking, and multimodal capabilities to help with questions that need further exploration and comparisons. On average, AI Mode queries are twice as long as traditional Search queries. We're getting really positive feedback from early users about its design, fast response time, and ability to understand complex nuanced questions. We also continue to see significant growth in multimodal queries.

Circle to Search is now available on more than 250 million (200m last qtr)  devices with usage increasing nearly 40% this quarter and monthly visual searches with Lens have increased by 5 billion since October.

Moving on to Cloud. At Cloud Next,..We provide leading cost performance and reliability for AI training and inference. This enables us to deliver the best value for AI leaders at any scale and contextual AI as well as global brands like Verizon. And for highly sensitive data and regulatory requirements, Google distributed Cloud and our Sovereign AI make Gemini available on premises or in country.

Our Vertex AI Platform makes over 200 foundation models available, helping customers like Lowe's integrate AI. We offer industry leading models including Gemini 2.5 Pro, 2.5 Flash, Imagen 3, Veo 2, Chirp and Lyria, plus Open Source and third-party models like Llama 4 and Anthropic. We are the leading Cloud Solution for companies looking to the new era of AI agents, a big opportunity.

Our Agent Development Kit is a new Open Source Framework to simplify the process of building sophisticated AI agents and multi-agent systems. And Agent Designer is a low-code tool to build AI agents and automate tasks in over 100 enterprise applications and systems.

With Google Agent Space, employees can find and synthesize information from within their organization, converse with AI agents and take action with their enterprise applications. It combines Enterprise Search, Conversational AI or Chat and access to Gemini and third-party Agents.

We also offer prepackaged agents across customer engagement, coding, creativity and more that are helping to provide conversational customer experiences, accelerate software development and improve decision making. And of course, Google Workspace, it delivers more than 2 billion AI assists monthly including summarizing Gmail and refining Docs.

This quarter, we were excited to announce our intent to acquire Wiz, a leading cloud security platform that protects all major clouds and code environments. Together, we can make it easier and faster for organizations of all types and sizes to protect themselves, end-to-end and across all major clouds. We think this will help spur more multi-cloud computing, something customers want (since GOOG is no. 3, it needs multi-cloud as an attractive option for clients, ie take incremental share from AWS and Azure)

Next, YouTube. We continue to diversify subscription options, recently expanding our Premium Lite pilot to the US. TV is the primary device for YouTube viewing in the US. According to Nielsen, YouTube has been number one in streaming watch time in the US for the last two years. And YouTube now has over 1 billion monthly active podcast users. YouTube Music and Premium reached over 125 million subscribers, including trials, globally.

Waymo is now safely serving over a quarter of a million paid passenger trips each week. That's up 5x from a year ago.

Philipp Schindler COO

the 10% increase in Search and other revenues was led by financial services, primarily due to strength in insurance, followed by retail. YouTube saw a similar performance across verticals. Its 10% growth in advertising revenues was driven by Direct Response followed by Brand.

All around the world, over 2 billion people use Search every day to find information, compare products, or shop. And there are more than 5 trillion searches on Google annually. We've continued our efforts to help more people ask entirely new questions, bringing more opportunities for businesses to connect with consumers. And as we've mentioned before, with the launch of AI Overviews, the volume of commercial queries has increased.

Q1 marked our largest expansion to-date for AI Overviews, both in terms of launching to new users and providing responses for more questions. The feature is now available in more than 15 languages across 140 countries. For AI Overviews overall, we continue to see monetization at approximately the same rate, which gives us a strong base on which we can innovate even more.

Turning to Visual Queries. On the last earnings call, I mentioned the success we're seeing with Lens, where shoppers use their camera or images to quickly find information in ways they couldn't before. In Q1, the number of people shopping on Lens grew by over 10% and the majority of Lens queries are incremental.

Throughout 2024, we launched several features that leverage LLMs to enhance advertiser value, and we're seeing this work pay off. The combination of these launches now allows us to match Ads to more relevant Search queries, and this helps advertisers reach customers in searches where we would not previously have shown their Ads.

Thanks to dozens of AI part improvements launched in 2024, businesses using Demand Gen now see an average 26% year-on-year increase in conversions per dollar spent for goals like purchases and leads. And when using Demand Gen with product feed, on average, they see more than double the conversion per dollar spent year-over-year.

YouTube, Creators are what drives viewership, and on average, they upload 20 million videos a day to YouTube. Our biggest creators generate a level of fandom and viewer engagement around large cultural moments on YouTube that brands can't find anywhere else.

Anat Ashkenazi CFO

We had another strong quarter in Q1, Consolidated revenues of $90.2 billion increased by 12% or 14% 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 $36.4 billion up 8%. TAC was $13.7 billion up 6%. We continue to see a revenue mix shift with Google Search growth at double-digit levels, while network revenues, which have much higher TAC rate, declined.

Operating income increased 20% this quarter to $31 billion and operating margin increased to 33.9%, representing 2.3 points of margin expansion.

Operating margin benefited from healthy revenue growth, a moderated pace of compensation growth, and a favourable mix shift towards lower TAC advertising revenues, partially offset by a year-on-year increase in depreciation expenses of just over $1 billion.

Other income and expenses was $11.2 billion primarily due to unrealized gain on our non-marketable equity securities related to our investment in a private company, which we noted in our 10-K as a subsequent event.

Net income increased 46% to $34.5 billion and earnings per share increased 49% to $2.81. We delivered free cash flow of $19 billion in the first quarter and $74.9 billion for the trailing 12 months. We ended the quarter with $95 billion in cash and marketable securities.

Subscription platforms and device revenues increased 19% to $10.4 billion primarily reflecting growth in subscription revenues. This growth was primarily driven by YouTube subscription offerings followed by Google One, with growth in the number of subscribers being the biggest driver of revenue growth. Google services operating income increased 17% to $32.7 billion and operating margin increased from 39.6% to 42.3%.

Turning to the Google Cloud segment, which continued to deliver very strong results this quarter. Revenue increased by 28% to $12.3 billion in the first quarter, reflecting growth in GCP across core and AI products at a rate that was much higher than Cloud's overall revenue growth rate. Growth in Google Workspace was primarily driven by an increase in average revenue per seat. Google Cloud operating income increased to $2.2 billion and operating margin increased from 9.4% to 17.8%.

Outlook

I would like to provide some commentary on several factors that will impact our business performance in the second quarter and the remainder of 2025. First, in terms of revenue, I'll highlight a couple of items that we mentioned last quarter that will have an impact on second quarter and 2025 revenue.

First, in Google Services, advertising revenue in 2025 will be impacted by lapping the strength we experience in the financial service vertical throughout 2024. Second in Cloud, we're in a tight demand supply environment and given that revenues are correlated with the timing of deployment of new capacity, we could see variability in cloud revenue growth rates depending on capacity deployment each quarter. We expect relatively higher capacity deployment towards the end of 2025.

We still expect to invest approximately $75 billion in CapEx this year. In terms of expenses, first, as I mentioned on our previous earnings call, the significant increase in our investments in CapEx over the past few years will continue to put pressure on the P&L, primarily in the form of higher depreciation. In the first quarter, we saw 31% year-on-year growth in depreciation from the increase in technical infrastructure assets placed in service. Given the increase in CapEx investments over the past few years, we expect the growth rate in depreciation to accelerate throughout 2025. Second, as we've previously said, we expect some headcount growth in 2025 in key investment area.

As we announced last quarter, YouTube and Cloud exited 2024 at a combined annual run rate of $110 billion.

Question-and-Answer Session

Demand outlook

We saw broad-based strength across ad verticals in Q1, and to give you a bit of vertical colour here. Search was led again, by finance due primarily to ongoing strength in the insurance, retail, healthcare, and travel were actually also sizable contributors here to growth. With regard to Q2, we're only a few weeks in, so it's really too early to comment. I mean, we're obviously not immune to the macro environment. But we wouldn't want to speculate about potential impacts beyond noting that the changes to the de minimis exemption will obviously cause slight headwind to our Ads business in 2025, primarily from APAC-based retailers (Temu/Shein). And maybe to zoom out, I would say, we have a lot of experience in managing through uncertain times, and we focus on helping our customers by providing deep insights into changing consumer behaviour that is relevant to their business. Examples are auction dynamics, query trend insights on topics, replacement purchases, and so on. So we have a lot of experience in this area.

AI Overview monetisation

But as I talked about it before, for AI Overviews overall, we see the monetization at approximately the same rate, which gives us a strong base on which we can innovate even more. So I'm very happy with this. I don't think this is the moment to go into the details of click-through rates and conversion and so on. But overall, we're happy with what we're seeing.

Cost out

But certainly this helps us as we think about the investments we need to make in innovation to drive long-term sustainable growth profile for the company. We're able to repurpose some of these efficiencies into these investments as well as you think about the increase in CapEx we've seen over the past several years and what we're investing this year, this will put additional pressure on the income statement and the form of depreciation. So we're working hard to try and offset some of the headwinds.

Consumer AI landscape

I think the foundation for everything is obviously the frontier model progress we are seeing and particularly with 2.5 Pro and Flash I think we're well positioned. We are seeing tremendous reception from developers, enterprises, and consumers too. And obviously, we are delivering consumer AI experiences across our product portfolio, including the primary way people experience it is obviously in Search with AI Overviews and very early days with AI Mode, but that will be a consumer AI forward experience. And we're already seeing very positive feedback. Queries are people are typing in roughly 2x longer queries compared to a traditional Search.

And in the Gemini app, which you asked about, we've really seen increased momentum, particularly over the last few weeks as we have rolled out not just the newer models, but we are seeing users are really responding well to all the innovation Gemini Live, which is based on Project Astra has been very well received. Deep Research, I think, based on 2.5 Pro is SOTA and that's been well received. And Canvas, we've had a lot of traction as well. And so we are definitely investing more. We have recently organized ourselves better to capitalize on this momentum and I'm excited about our road map there.

Cost Control-Cloud demand

We do see a tremendous opportunity ahead of us across the organization, whether it's to support Google Services, Google Cloud, and Google DeepMind. Recall, I've stated on the Q4 call that we exited the year in Cloud specifically with more customer demand than we had capacity. And that was the case this quarter as well. So we want to make sure we ramp up to support customer needs and customer demands. Having said that, we're investing in long-term and we're investing in innovation. That's the essence of our business. And we want to do it in a responsible fashion.

Gemini behind Chat GPT

, but we are definitely I think there's been a lot of momentum in terms of product features we've been introducing, and we are definitely seeing reception, including increased adoption and usage based on those features. So I think we are in a good positive cycle. The recent advances on the model frontier. By many metrics, I think we have the best model out there now and I think that's going to drive increased adoption as well. And again I would reiterate people are using obviously we have 1.5 billion users through AI Overviews interacting with AI in a deep way, in a very engaged way. Obviously, we are innovating with AI Mode. And we have a very exciting road map ahead with the Gemini app as well. So across the board, super, super excited about what's ahead.

Internal use of AI

Look, on internally, I mean, this has been an extraordinary amount of focus and excitement both because I think we are the early use cases have been transformative in nature and I think this still feels like early days and long ways to go. Obviously, I had mentioned a few months ago in terms of how we are using AI for coding. We are continuing to make a lot of progress there in terms of people using coding suggestions. I think the last time I had said the number was like 25% of code that's checked in involves people accepting AI suggested solutions. That number is well over 30% now. But more importantly, we have deployed more deeper flows and particularly with the newer models I think we are working on early agentic workflows and how we can get those coding experiences to be much deeper. We are deploying it across all parts of the company. Our customer service teams are deeply leading the way there. We've both dramatically enhanced our user experience as well as made it much more efficient to do so. And we are actually bringing all our learnings and expertise in our solutions through cloud to our other customers. It's deeply embedded in everything we do, but I still see it as early days, and there's going be a lot more to do.

Use of AI mode

There's a lot more complex nuance questions. People are following through more. People are appreciating the clean design, the fast response time, and the fact that they can kind of be much more open-ended can undertake more complicated tasks, product comparisons, for example, has been a positive one exploring how-tos, planning a trip. So those are the kinds of early feedback we are seeing. And I think we are obviously really focused on improving the product across all of AI Mode, AI Overviews and the Gemini app, and we are seeing positive user traction as well.

Ability to offset D&A cost increases

Having said that, we do have significant investments we're making across the organisation and we have been making them for the past several quarters. And we've been able to do it because we were able to find efficiency to fund those investments across the organization. Those are for products and services that are going to drive long-term growth for the company. So while we're trying to offset as much of the headwind associated with the increase in infrastructure costs, it will become more difficult. As I said, the depreciation will accelerate. We had about a 31% year-over-year growth in depreciation this quarter and it will be higher as we go throughout the year. So think about that kind of as a headwind that we have to manage against. But we're continuing with, pushing across the organization leveraging, Sundar mentioned, the use of AI and kind of an AI-first Google across several of our functions to help us manage a larger scope of work using our AI, AI agents, and AI tools. So there are opportunities, but there are also great opportunities for investment and we want to make sure that we make room for, to make these investments to drive long-term growth and ensure we have a very resilient long-term growth profile for the company.

Waymo business model

the thing that excites me is I think we've been laser-focused and we'll continue to be on building the world's best driver. And I think doing that well really gives you a variety of optionality and business models across geographies et cetera. It'll also require a successful ecosystem of partners and we can possibly do it all ourselves. And so I'm excited about the progress the teams have made through a variety of partnerships. Obviously highlight of it is a partnership with Uber. We are very pleased with what we are already seeing in Austin in terms of rider satisfaction. We look forward to offering the first paid rides in Atlanta via Uber later this year. But we are also building up a network of partners, for example, for maintaining fleets of vehicles and doing all the operations related to that with the recently announced partnership with Moove in Phoenix and Miami, obviously partnerships with OEMs. There is future optionality around personal ownership as well. So we are widely exploring and but at the same time clearly staying focused and making progress both in terms of safety, the driver experience and progress on the business model and operationally scaling it up.

Differences AI overview and Gemini

AI-powered Search and how do we see our consumer experience. Look I do think Search and Gemini obviously will be two distinct efforts. I think there are obviously some areas of overlap, but there are also like expose very, very different use cases. And so for example, in Gemini, we see people iteratively coding and going much deeper on a coding workflow as an example. So I think both will be around. Within Search we think of AI Overviews scaling up and working for our entire user base, but an AI Mode is the tip of the tree for us pushing forward on an AI forward experience. There will be things which we discover there which will make sense in the context of AI Overviews. So I think will flow through to our user base. But you almost want to think of what are the most advanced 1 million people using Search for, the most advanced 10 million people and then how do 1.5 billion people use Search for. And we want to innovate and so I think this allows us to do that. But the true north through all of this is user feedback, user satisfaction, user experience. And so that will determine where this all works out in the future.

Costs driver offsets, GM

And to your question on gross margin, a couple of trends to highlight there. And I've mentioned this in the prepared remarks, you've seen improvement in TAC that's really driven by the change in revenue mix with a continued Search, growth and then network revenue declines. Network revenue has a much higher TAC rate. So that mix is helping us from a gross margin perspective. So think about that as well. Now we do have depreciation for technical infrastructure hits in two places primarily in two places in the income statement. One is in other cost of sales and the rest is in R&D. So it is in that line item that's impacting cost of sales. Now we've had some efficiencies there and I did mention the improvement in our overall cost of headcount growth and compensation kind of moderating those growth. So that helps us as well more than offset the depreciation increases in Q1. But as I mentioned this number will be higher in the coming quarters. Recall, we have we set approximately $75 billion in CapEx, which is up from $55 billion or just over $50 billion last year. So there's expected to be quite a significant increase in depreciation.