Alphabet experienced negative free cash flow for the first time in at least a decade, recording -$5.9 billion in the last quarter, a significant drop from $10.1 billion in the prior quarter. This deficit was driven by substantial capital expenditures, which roughly doubled from the previous year to $44.9 billion, with approximately 60% allocated to servers and 40% to data centers. Chief Financial Officer Anat Ashkanazi attributed nearly all of this increased spending to AI-related investments, despite the company's strong operating cash flow of $39.1 billion.
Alphabet's total revenue for the quarter reached $119.8 billion, a 23% increase year-over-year. The company's cloud division, Google Cloud, saw an impressive 82% surge in revenue to $24.8 billion, contributing 63% to Alphabet's overall operating income growth and achieving an operating margin of 35.6%. This rapid growth is a testament to the high demand for AI compute and infrastructure. CEO Sundar Pichai noted that demand for AI still outpaces investment, and described the company's approach to generating financial returns on this spending as "disciplined."
However, the extensive AI investment is having a significant impact on Alphabet's financial structure. The company is now expected to incur capital spending of $205 billion this year, an increase from a previous estimate of $190 billion. To fund these expansions, Alphabet has turned to external financing, issuing $49.6 billion in stock and mandatory convertible preferred shares, and an additional $20.3 billion in senior notes during the quarter, leading to a long-term debt of $98.2 billion. Free cash flow decreased from $5.3 billion to -$5.9 billion, and the company ceased stock buybacks, compared to $13.2 billion in the same quarter of 2025.
