Alphabet Inc. Depository Shs Repr 1/20th Conv Pfd Registered Shs

Strong topline growth; free cash flow pressured (good but not “clean”) - Alphabet Q3 revenues $127.6B, +25% YoY (reported and constant currency). 13th consecutive quarter of double-digit growth. - Operating income $40.6B (+30%), operating margin 31.8%. - Cash flow / balance sheet: operating cash flow $42.3B in the quarter; ending cash & marketable securities $265.1B. - Big negative: Free cash flow = -$9.1B in Q3 due to CapEx ($51.4B) for AI infra + inventory build for TPU system sales, plus a $5.2B cash payment related to a 2018 EC fine. Trailing-12-month FCF still positive ($19.7B).

AI is accelerating usage and monetization—but Search monetization is in transition (surprising/important) - AI-driven demand signals: highest Search query growth in 5 years; AI Mode queries ~3x longer than traditional searches and 1 in 5 AI Mode searches use voice/images/documents. - Gemini usage growth: ~32B tokens/min via first-party model APIs (+40% QoQ, >4x YoY). Gemini app hits 1B users; fastest-growing product in Google’s history. - Search challenge/“disconnect” acknowledged: while query growth is strong, Search ad monetization is currently lagging, especially because AI Mode/AI Overviews initially monetized at lower rates. - Management response: plans to scale high-quality ads into AI Overviews and AI Mode (including international expansion and multiturn ads in the U.S.) to improve monetization over time.

Google Cloud growth is exceptional; near-term margin pressured by capacity constraints (good with a catch) - Cloud Q3: $30.7B revenue, +103% YoY; operating income $11.1B (more than tripling) and operating margin 36.2%. - Demand drivers: AI infrastructure + AI solutions + core GCP, plus TPU system sales. - Near-term margin risk (explicit): Cloud started using third-party compute capacity late Q3; expects margin headwinds in Q4 as it ramps that capacity. - Capacity plans: they’re “working hard” to bring more capacity online; third-party compute partially offsets constraints but may reduce margin temporarily.