# How Alphabet makes money

CXProWealth Business Lens · Alphabet (GOOGL) · Q3 FY2026

Read from the 10-Q for the period 2026-07-01 to 2026-09-30, filed 2026-10-29 with the SEC (accession 0001652044-26-000084): https://www.sec.gov/Archives/edgar/data/1652044/000165204426000084/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $127.6B (+24.7% on the year)
- Operating income: $40.6B (operating margin 31.8%)
- Net income: $26.5B (net margin 20.7%)
- Gross margin: 59.7%
- Free cash flow: -$9.1B (-7.1% of revenue)
- Cash conversion (operating cash flow / net income): 1.60x
- Capital expenditure: 40.3% of revenue

## Where the money goes (Q3 FY2026)

- Revenues → Total costs and expenses: $87.0B
- Total costs and expenses → Cost of revenues: $51.4B
- Total costs and expenses → Research and development: $20.6B
- Total costs and expenses → Sales and marketing: $8.8B
- Total costs and expenses → General and administrative: $6.1B
- Revenues → Income from operations: $40.6B
- Income from operations → Other income (expense), net: $8.2B
- Income from operations → Income before income taxes: $32.4B
- Income before income taxes → Provision for income taxes: $5.9B
- Income before income taxes → Net income: $26.5B

## Income statement, as filed

| Line | Q3 FY2026 | Of revenue |
|---|---:|---:|
| Revenues | $127.6B | 100% |
| Cost of revenues | $51.4B | 40.3% |
| Research and development | $20.6B | 16.2% |
| Sales and marketing | $8.8B | 6.9% |
| General and administrative | $6.1B | 4.8% |
| **Total costs and expenses** | $87.0B | 68.2% |
| **Income from operations** | $40.6B | 31.8% |
| Other income (expense), net | -$8.2B | 6.4% |
| **Income before income taxes** | $32.4B | 25.4% |
| Provision for income taxes | $5.9B | 4.6% |
| **Net income** | $26.5B | 20.7% |
| Preferred stock dividends | $298.0M | 0.2% |
| **Net income available to common stockholders** | $26.2B | 20.5% |
| Basic net income per common share (Note 12) (in dollars per share) | $2 | 0.0% |
| Diluted net income per common share (Note 12) (in dollars per share) | $2 | 0.0% |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2013 | $55.5B | $15.4B | $12.7B | $18.7B | $7.4B | $11.3B |
| FY2014 | $66.0B | $16.5B | $14.1B | $23.0B | $11.0B | $12.0B |
| FY2015 | $75.0B | $19.4B | $16.3B | $26.6B | $10.0B | $16.6B |
| FY2016 | $90.3B | $23.7B | $19.5B | $36.0B | $10.2B | $25.8B |
| FY2017 | $110.9B | $26.2B | $12.7B | $37.1B | $13.2B | $23.9B |
| FY2018 | $136.8B | $27.5B | $30.7B | $48.0B | $25.1B | $22.8B |
| FY2019 | $161.9B | $34.2B | $34.3B | $54.5B | $23.5B | $31.0B |
| FY2020 | $182.5B | $41.2B | $40.3B | $65.1B | $22.3B | $42.8B |
| FY2021 | $257.6B | $78.7B | $76.0B | $91.7B | $24.6B | $67.0B |
| FY2022 | $282.8B | $74.8B | $60.0B | $91.5B | $31.5B | $60.0B |
| FY2023 | $307.4B | $84.3B | $73.8B | $101.7B | $32.3B | $69.5B |
| FY2024 | $350.0B | $112.4B | $100.1B | $125.3B | $52.5B | $72.8B |
| FY2025 | $402.8B | $129.0B | $132.2B | $164.7B | $91.4B | $73.3B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +15.1% (year before +13.9%): steady
- Operating income: +14.8% (year before +33.3%): slowing
- Net income: +32.0% (year before +35.7%): slowing
- Free cash flow: +0.7% (year before +4.7%): slowing

## Operating figures stated in the filing

- Employees: 204,757 employees (as of 2026-09-30). "As of September 30, 2026, we had 204,757 employees." (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Paid clicks change, year over year (Google Search & other): 8.0% (as of 2026-09-30). "Paid clicks change 8 % 11 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Cost-per-click change, year over year (Google Search & other): 4.0% (as of 2026-09-30). "Cost-per-click change 4 % 4 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- Cost-per-impression change, year over year (Google Network): 14.0% (as of 2026-09-30). "Cost-per-impression change 14 % 11 %" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- TAC rate: 20.0% (as of 2026-09-30). "The TAC rate decreased from 20.1% to 20.0% from the three months ended September 30, 2025 to the three months ended September 30, 2026" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
- TAC rate: 20.1% (as of 2025-09-30). "The TAC rate decreased from 20.1% to 20.0% from the three months ended September 30, 2025 to the three months ended September 30, 2026" (Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)

## Key insights

### Building capacity now costs more cash than operations bring in

Capital spending of $51.4B exceeded the $42.3B of operating cash flow, against $24.0B and $48.4B a year earlier, so free cash flow turned negative.

Capital expenditures, which the filing says mainly reflect technical infrastructure, were $51.4B this quarter against $24.0B a year earlier, 2.1 times as much. They took 40.3% of revenue, against 23.4% a year earlier. Operating cash flow was $42.3B against $48.4B, so free cash flow was negative $9.1B against positive $24.5B. _(from the filing)_
The scale stands out against Alphabet's own history. This one quarter's capital spending of $51.4B is more than half of last year's full-year total of $91.4B, and 97.8% of the full-year total the year before, $52.5B. It is also the second quarter in a row above operating cash flow: in the quarter before, spending was $44.9B against operating cash flow of $39.1B, and free cash flow was negative $5.9B. _(from the filing)_
The gap is being funded from outside. This year the filing reports new senior notes, an underwritten share offering, a private placement, mandatory convertible preferred stock and an at-the-market share program, and no share repurchases in the quarter. Preferred stock dividends of $298M appear on the income statement, against none a year earlier. _(from the filing)_
Analysis: spending ahead of cash flow is a bet that the new capacity fills with paying demand, and the filing itself warns the investment may not earn an adequate return. Depreciation starts only when assets enter service, so much of the cost of this build has yet to reach the income statement. _(analysis)_

### Revenue climbed all year while operating income stood still

Revenue rose from $109.9B to $127.6B across three quarters, yet operating income stayed between $39.7B and $40.8B, so operating margin slid from 36.1% to 31.8%.

By quarter this year, revenue was $109.9B, $119.8B and $127.6B, and operating income was $39.7B, $40.8B and $40.6B. Operating margin went from 36.1% to 34.0% to 31.8%. Cost of revenues rose faster than revenue, from $41.3B in the first quarter to $45.9B in the second and $51.4B in this one, where it took 40.3% of revenue against 38.4% in the second quarter. _(from the filing)_
The filing names the causes of higher cost of revenues: inventory and related costs for the TPU systems Alphabet now sells, depreciation, traffic acquisition costs, and content costs, largely for YouTube. Research and development rose 36.2% from a year earlier to $20.6B, faster than revenue's 24.7%, mainly on employee pay and depreciation. _(from the filing)_
Against a year earlier the margin still rose, by 1.29 points to 31.8%. But general and administrative expense fell 17.0% and took 2.41 points less of revenue, which the filing attributes mainly to lower legal costs, largely a European Commission fine accrued in the same quarter last year. Research and development took 1.37 points more. _(from the filing)_
Analysis: the year-on-year margin gain rests on the absence of last year's fine. Leave that line aside and the rest of the cost base took a larger share of revenue than a year earlier. The trend within this year is the cleaner read of how the investment is feeding into costs. _(analysis)_

### Operating income rose 29.9% while net income fell 24.3%

Other income swung from a $12.8B gain to an $8.2B loss, which the filing ties mainly to SpaceX shares, so operating and net income moved apart.

Income from operations rose 29.9% to $40.6B. Below it, other income (expense) moved from a gain of $12.8B a year earlier to a loss of $8.2B. The filing attributes the swing primarily to net unrealized losses on marketable equity securities, largely SpaceX, and smaller unrealized gains on non-marketable stakes, largely one private company. Pretax income fell to $32.4B from $44.0B and net income fell 24.3% to $26.5B. _(from the filing)_
The same stakes pushed the other way earlier this year. Net income was $62.6B in the first quarter, 1.6 times operating income of $39.7B, and $112.2B in the second, more than twice operating income of $40.8B. This quarter net income was 65.2% of operating income. _(from the filing)_
The effective tax rate fell to 18.2% from 20.5%, and the filing attributes part of the drop to lower pretax earnings from the unrealized equity losses. Diluted earnings per share fell to $2.12 from $2.87, and $298M of preferred dividends now sit between net income and what is available to common stockholders. _(from the filing)_
Analysis: net income now reflects the marked value of a few large holdings as much as the business itself. Operating income is the steadier measure of how Google performed, and comparing quarters on net income alone would mislead in either direction. _(analysis)_

### Google Cloud now earns over a quarter of operating profit

Cloud's $11.1B of operating income is 27.4% of Alphabet's total and 28.4% of Google Services', and the filing credits Cloud first for revenue growth.

Google Services earned $39.2B of operating income, 96.5% of Alphabet's $40.6B, and Google Cloud earned $11.1B, 27.4%. Other Bets lost $2.05B, a loss equal to 5.0% of the total. The segments add up to more than the whole because shared AI research is charged at the Alphabet level, outside the segments. _(from the filing)_
The filing explains the quarter's 24.7% revenue growth first by Google Cloud, whose revenue more than doubled on infrastructure, platform services and TPU system sales, and second by Google Services. It credits Cloud's higher operating income to revenue growth, partly offset by inventory costs for TPU systems and usage costs for technical infrastructure. _(from the filing)_
Analysis: Cloud has become a second profit engine beside advertising, and it is the segment that rents out the capacity Alphabet is building. Its operating income is therefore the most direct evidence of whether the capital spending earns a return. TPU system sales add hardware costs and uneven timing that consumption and subscription revenue do not. _(analysis)_

### Competitive edge

- **Search still grows on both clicks and price** Paid clicks rose 8% and cost-per-click 4%, so search revenue grew from more use and a higher value per click at once.
- **Distribution is paid as a share, steady at 20%** The TAC rate was 20.0% against 20.1% a year earlier, so the cost of being the default search moves with revenue rather than ahead of it.
- **One infrastructure build serves Google and Cloud customers** Data centers, TPUs and models built for Google's own products are also rented and sold through Cloud, which earned 27.4% of operating income.

### What to watch

- **Long commitments could leave capacity Alphabet cannot fill** The filing warns its AI infrastructure may not earn an adequate return, while backstops, guarantees and TPU repurchase terms extend the exposure beyond its own spending.
- **Antitrust remedies aim at the distribution deals behind Search** Courts and regulators could restrict default and revenue-sharing agreements and require search data sharing, the arrangements behind the profit of Google Services.
- **Outside funding brings dilution and fixed preferred dividends** With free cash flow negative, Alphabet is issuing debt and shares, and $298M of preferred dividends now come before common stockholders, against none a year earlier.

## Operating income by segment

- Google Services: $39.2B (96.5% of operating income)
- Google Cloud: $11.1B (27.4% of operating income)
- Other Bets: -$2.0B (-5.0% of operating income)

## Investor view

**Alphabet's capital spending reached 40.3% of revenue, more than its operations brought in as cash**

### How it makes money

Alphabet earns money three ways: advertising, which the filing describes as "relevant, cost-effective online advertising"; cloud computing sold to enterprises; and sales of subscriptions, apps, devices and TPU systems. Google Services, which holds advertising, subscriptions and devices, earned $39.2B of operating income this quarter, 96.5% of Alphabet's $40.6B total. _(from the filing)_
Search advertisers pay when a user clicks, and the filing tracks volume and price separately: paid clicks rose 8% and cost-per-click rose 4% from a year earlier. Google passes part of that revenue to the browsers, carriers and device makers that send searches its way, as traffic acquisition costs. The TAC rate was 20.0%, against 20.1% a year earlier. _(from the filing)_
Google Cloud charges mostly by consumption and subscription for computing capacity, AI models, security and data tools, plus Workspace seats. Since the second quarter of this year it also sells TPU systems outright to customers who run them on their own premises. Cloud earned $11.1B of operating income, 27.4% of Alphabet's total. _(from the filing)_
The cost base is large and, in the filing's words, "generally less variable in nature". Cost of revenues took 40.3% of revenue, leaving a gross margin of 59.7%, and research and development took 16.2%. Other Bets, mainly autonomous rides and internet services, posted an operating loss of $2,047 million, and shared AI research is charged at the Alphabet level, so the two Google segments together earn more than the company as a whole. _(from the filing)_

### What shifted

Revenue rose 24.7% to $127.6B from $102.3B. The filing credits Google Cloud first, whose revenue more than doubled on infrastructure, platform services and TPU system sales, and Google Services second, which grew at a slower rate. The growth is now led by the newer segment, not by advertising. _(from the filing)_
Operating income rose 29.9% to $40.6B, faster than revenue, because two lines moved in opposite directions. General and administrative fell 17.0% to $6.1B, 2.41 points less of revenue, since the quarter a year earlier carried a large European Commission fine. Research and development rose 36.2% to $20.6B, 1.37 points more of revenue, on employee pay and depreciation. _(from the filing)_
Below the operating line the quarter reversed. Other income swung from a $12.8B gain to an $8.2B loss, which the filing attributes mainly to unrealized losses on marketable equity, largely SpaceX. Pretax income fell to $32.4B from $44.0B, net income fell 24.3% to $26.5B, and diluted earnings per share fell to $2.12 from $2.87. The effective tax rate eased to 18.2% from 20.5%. _(from the filing)_
Cash moved apart from profit. Operating cash flow was $42.3B against $48.4B a year earlier, while capital expenditures, mostly technical infrastructure, rose to $51.4B from $24.0B. Free cash flow was negative $9.1B against $24.5B a year earlier, the second negative quarter in a row after negative $5.9B in the quarter before. _(from the filing)_
Against last year margins rose, but within this year they narrowed. Cost of revenues grew from $41.3B in the first quarter to $45.9B in the second and $51.4B in this one, faster than revenue, which went from $109.9B to $119.8B to $127.6B. The filing names the causes: inventory costs for the TPU systems sold, depreciation, traffic acquisition costs and content costs, largely for YouTube. _(from the filing)_

### Risks in the filing

Alphabet says its growing investment in AI infrastructure, including its own TPUs, may not be commercially viable or earn an adequate return. It has signed long-term supply, energy and lease agreements, backstops and guarantees for third-party data centers and power, and obligations to repurchase some TPU hardware below original cost. If counterparties fail or demand falls short, it could be left with excess capacity it cannot easily redeploy. _(from the filing)_
The company names antitrust cases brought by the Justice Department, states and others over Search distribution, advertising technology, Android and the Play Store. It says remedies could restrict default distribution and revenue-sharing agreements, require sharing search data and syndication with rivals, change app store billing, or force divestiture of advertising technology assets, reducing reach and advertising revenue. _(from the filing)_
On AI, the filing lists harmful content, inaccuracy, intellectual property and privacy claims, and says that in testing it has "sometimes observed unexpected behavior, including autonomous agents taking actions outside of their intended scope." It adds that attackers increasingly use AI, and that AI agents open new routes for data theft and unauthorized actions. _(from the filing)_
Alphabet now says it may rely on capital markets for debt and equity, including an at-the-market share program, and that difficulty raising money on good terms could restrict its investment. It names dilution from new shares and from converting its mandatory convertible preferred stock, and says it cannot guarantee buybacks or common dividends will continue. _(from the filing)_
Of these, the numbers already show the investment and financing risks taking shape. Capital spending exceeded operating cash flow for a second quarter, free cash flow turned negative, and preferred stock dividends appear on the income statement where there were none a year earlier. The antitrust and AI risks are not yet visible in the operating figures. _(analysis)_

## Founder view: mechanisms

### An auction prices stated intent

A search is a person stating a need. Google sells the moment after that statement through an auction: advertisers bid for the query, and Google is paid when the user clicks. Revenue grows from more paid clicks and from a higher price per click, and the price is set by competing bidders rather than negotiated sale by sale. Better ad formats and relevance raise what each query is worth to bidders. _(analysis)_

### Revenue share buys distribution

Google pays browser makers, mobile carriers, device makers and publishers a share of the advertising revenue their traffic produces. Distribution becomes a variable cost: it rises only when revenue does. A company that earns more per user than its rivals can afford a larger share, which is how the default position is won and kept. _(analysis)_

### Sell the infrastructure built for yourself

Alphabet builds data centers, networks and its own TPU chips to run Search and YouTube, then rents that capacity through Google Cloud and now sells TPU systems outright. Internal demand justifies the first build; outside customers spread its fixed cost. The same models that serve Google's products are sold to enterprises, so research spending has two buyers. _(analysis)_

### A profitable core funds long bets

Google Services generates the profit that pays for Other Bets, such as autonomous transport and life sciences, and for frontier AI research. Alphabet reports these costs separately from the Google segments, so the price of each long bet is visible rather than buried in the core's margin. _(analysis)_

## Member research

Signed-in members read, on the page: what Alphabet's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Alphabet 10-Q for the period to 2026-09-30: https://www.sec.gov/Archives/edgar/data/1652044/000165204426000084/ (2026-10-29)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02