Google said search query growth on its platform was the strongest it has been in five years. Revenue from those queries grew 12%.
That gap between usage and money is what the market reacted to. Alphabet shares fell about 10% in extended trading after the across-the-board earnings miss, CNBC reported.
Key numbers
- $63 billion search and other revenue in the third quarter, up 12% from a year earlier and below estimates for the second straight quarter
- 12% search revenue growth, down from 17% in the second quarter and 19% in the first
- $31 billion Google Cloud revenue, more than double a year earlier
- $9 billion negative free cash flow for the quarter, three times the estimated deficit
Three quarters of slowing search growth
The deceleration is the part that is hard to wave away: 19%, then 17%, then 12%. Alphabet executives said foreign exchange was the biggest factor behind the slowdown in the period, and said the currency effect would be larger in the fourth quarter.
I went through both reports, and they agree on the framing rather than the cause. MarketWatch wrote that a doubling of cloud revenue was not enough to settle investors who are worried that AI is hurting the company's ability to earn money from search queries. CNBC reported that early signs of a shift are appearing, while noting that search remains a very large business.
In plain words: Google earns most of its search money from ads shown beside results, so advertisers pay when people click. If someone asks an AI assistant a question instead of scrolling a results page, the query still happens but there are fewer paid clicks attached to it. That is why query growth and revenue growth can move apart.
Google's own account is that AI is helping the ads business. Chief Business Officer Philipp Schindler said on the earnings call that Gemini models are being deployed across the company's ads infrastructure, that the quarter brought what he called the biggest update to product listing ads in a decade, and that advertisers used Gemini to generate more than 1.5 billion campaign assets, up more than sevenfold from a year earlier.
Gil Luria, an analyst at D.A. Davidson, told CNBC by email that investors will now worry the misses in search, YouTube and subscriptions point to AI finally reaching Google, while adding that he would not rush to conclusions based on one quarter.
Cloud doubled, and the cash went out
Google Cloud revenue more than doubled to nearly $31 billion, and the backlog of contracted work reached roughly $560 billion. Management said it expects just over half of that backlog to be recognized over the next 24 months.
Building for that backlog is why cash is leaving first. Alphabet maintained its full-year 2026 capital expenditure range of $195 billion to $205 billion and said spending would rise further in 2027. Part of it goes to tensor processing units, the company's own AI chips, which it began selling to outside customers in the second quarter.
"You see cash going out and we're building up the inventory base," CFO Anat Ashkenazi said on the call, describing the gap before customers are billed for those systems.
Free cash flow was negative $9 billion for the quarter, three times the estimated deficit, after turning negative for the first time as a public company in the second quarter at $5.9 billion.
For scale, Microsoft reported the same evening that Azure revenue rose 48% from a year earlier to $33.2 billion, according to CNBC.