Alphabet Q3: Cloud Revenue Doubles as Capex and Cash Flow Diverge

What happened

The report covers the three months ended Sept 30 and was released after the U.S. market close on Oct 28. Quarterly revenue rose to $127.6 billion from $102.3 billion a year earlier, operating income reached $40.6 billion, up 30% year over year, for an operating margin of 31.8%. Alphabet shares fell in after-hours trading, by about 8% according to reports.

Google Services remained the revenue base, with quarterly revenue of $96.3 billion, up 11% year over year, and operating income of $39.2 billion. Search and other revenue was $63.4 billion, up 12% but below the $64.96 billion market expectation; YouTube advertising revenue was $11.2 billion, up 9%; Google Network revenue was $7.5 billion, nearly flat; subscriptions, platforms and devices revenue was $14.3 billion, up 11%.

Cloud was the fastest-growing segment. Google Cloud revenue reached $30.7 billion, up 103% year over year, above the $29.57 billion average estimate compiled by LSEG; operating income rose to $11.1 billion from $3.6 billion a year earlier, for an operating margin of about 36.2%. Alphabet said growth came from enterprise AI infrastructure, AI solutions and core cloud platform services, and that sales of its in-house TPU chip systems made a meaningful contribution.

Spending and financing both grew. Quarterly operating cash flow was $42.29 billion, capital expenditure was $51.36 billion, up 114% year over year, and free cash flow was negative $9.07 billion, after negative $5.86 billion in the previous quarter. Alphabet raised $12.4 billion through share sales and $28.7 billion through notes during the quarter and repurchased no shares; the company kept its full-year 2026 infrastructure spending outlook at $195 billion to $205 billion.

What they said

Alphabet chief executive Sundar Pichai said in a statement accompanying the results: “We had a strong quarter and are now on a half-trillion dollar revenue run rate. Our deep full-stack approach is driving momentum across the business.” Pichai added that AI investments were driving overall Search query growth, including commercial queries, with year-over-year query growth at its highest rate in five years.

Pichai also disclosed in the statement that the Gemini app had reached 1 billion users and that Alphabet’s own model APIs were processing nearly 32 billion tokens a minute, more than four times the level of a year ago. Google Cloud chief executive Thomas Kurian said momentum was driven by an integrated AI portfolio of chips, models, data, security and agent platforms, designed to work together.

Melissa Otto, global head of Visible Alpha Research at S&P Global, said Google Cloud’s margin widening to 36.2% eased concerns that the margin had peaked in the previous quarter. On the market side, several reports noted that free cash flow of negative $9.07 billion came in far below analyst expectations, with the scale of capital expenditure forming the immediate backdrop to the after-hours share decline.

Key facts

1. Total revenue: $127.6 billion, up 25% year over year, slightly below the $128.2 billion market expectation; $102.3 billion a year earlier.
2. Google Cloud: revenue of $30.7 billion, up 103% year over year, above the $29.57 billion average estimate compiled by LSEG; operating income of $11.1 billion versus $3.6 billion a year earlier.
3. Search and YouTube: Search and other revenue of $63.4 billion, up 12%, below the $64.96 billion expectation; YouTube advertising revenue of $11.2 billion, up 9%.
4. Profit: operating income of $40.6 billion, up 30% year over year; net income of $26.2 billion versus $34.9 billion a year earlier; earnings per share of $2.12, below the $3.02 expectation and $2.87 a year earlier.
5. Equity securities: the line swung from a $10.7 billion net gain a year ago to an $8.7 billion net loss, which the company said reduced earnings per share by about $0.55.
6. Capex and cash flow: capital expenditure of $51.36 billion, up 114% year over year from $24.0 billion; operating cash flow of $42.29 billion; free cash flow of negative $9.07 billion, after negative $5.86 billion in the previous quarter.
7. Financing: $12.4 billion raised through share sales and $28.7 billion through notes during the quarter, with no share repurchases.
8. Full-year outlook: the 2026 infrastructure spending outlook stays at $195 billion to $205 billion.
9. Same-day comparison: Microsoft reported fiscal first-quarter 2027 results the same day, with revenue of $92.3 billion, up 19% year over year; Azure revenue of $33.2 billion, up 48%, disclosed in dollar terms for the first time.