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Alphabet (GOOG -4%) is heading lower following its Q2 results last night. The search giant reported its sixth consecutive EPS beat although it was much smaller upside than Q1. Revenue rose 13.6% yr/yr to $84.74 bln, which was modestly better than analyst expectations. Operating margin improved to 32% from 29% in the year ago period.

• Starting with its Google Advertising segment, revenue rose 11.1% yr/yr to $64.62 bln. There have been investor concerns that the emergence of generative AI will hurt its bread-and-butter search business. There was a bit of slippage from Q1's robust 13% yr/yr growth but it is unclear how much impact AI had. Within the GA segment, Google Search revs were +13.8% yr/yr to $48.51 bln; YouTube ads revs +13% to $8.66 bln, which were a bit light of street estimates; Google Network -5.2% to $7.44 bln.
• YouTube had healthy watch time growth, it continued to close the monetization gap in Shorts, and had continued momentum in connected TV with its brand benefiting in part from an ongoing shift in budgets from linear television to digital. However, there was a sequential decline in the year-on-year growth rate for YouTube subscriptions as it anniversaried the impact of a price increase for YouTubeTV in Q2 of last year. The impact will persist through the balance of the year.
• The company talked a lot about its own AI enhancements, namely that it's delivering better responses on more types of Search queries and introducing new ways to Search. GOOG is seeing positive trends from its testing as it rolls out AI overviews. People who are looking for help with complex topics are engaging more. And it is seeing even higher engagement from younger users aged 18 to 24 when they use Search with AI overview. Also, more than 1.5 mln developers are now using its Gemini AI platform.
• Google Cloud was a bright spot with revenue jumping 28.8% yr/yr to $10.35 bln, a slight acceleration from the 28.4% growth seen in Q1. Notably, quarterly revenue crossed the $10 bln mark for the first time and passed the $1 bln mark in quarterly operating profit. Google Cloud continues to see strong customer interest, winning major brands like Hitachi, Motorola Mobility, and KPMG. GOOG says its deep partnership with Oracle significantly expanded its joint offerings to their large customer base.
• Head count declined sequentially in Q2, which reflects actions taken by the company and a much slower pace of hiring. Looking ahead, GOOG expects a slight increase in head count in Q3 as it invests in top engineering and technical talent, particularly in Cloud and technical infrastructure. As such, GOOG believes Q3 operating margin will be impacted by the new hires and a pull forward of hardware launches into Q3.

Overall, we think the stock is lower due to a combination of slower growth in advertising relative to Q1, a bit of a shortfall from YouTube and sentiment was running pretty high heading into this report given its strong uptrend since early March. The stock has run from the low $130's in early March to around $184 at yesterday's close. As such, any worries about search revenue and the impact of AI competitors was going to cause some pullback.