$Alphabet(GOOGL.US)first take: The performance in the third quarter was quite good, with both revenue and profit exceeding market expectations, with profit being particularly impressive.

(1) Revenue from cloud services and Google Other revenue were the main areas of outperformance.

The former benefited from AI, while the latter was likely driven mainly by YouTube subscription services. The financial report specifically disclosed that over the past four quarters, the combined revenue from YouTube's ads and subscriptions exceeded $50 billion, meaning subscription revenue surpassed $15 billion, accounting for nearly 40% of Google Other revenue.

In comparison, the growth in advertising was strong, and market expectations were relatively sufficient, with search ads slightly exceeding expectations and affiliate ads performing better than anticipated, mainly due to the market's conservative expectations and benefiting from the company's decision last quarter to delay the abandonment of third-party cookies. YouTube's advertising performance was basically in line with expectations.

(2) Q3 operating profit significantly exceeded expectations, benefiting from the synchronized impressive performance of revenue scale and profit margin.

The market originally expected a trend where, according to the recognition of incremental costs related to AI investments and the management's guidance on the sequential growth of employee numbers last quarter, the operating profit margin in Q3 would decline by 2 percentage points to 30% sequentially.

However, the actual situation was: Google did indeed add new employees in Q3, but the increase was not substantial, and the total number of employees decreased compared to last year. The growth rate of R&D expenses slightly slowed, sales expenses increased slightly, while management expenses still declined by nearly 10% year-on-year. This ultimately kept the operating profit margin at 32%, with Google Services' profit margin also maintaining at 40%, and the operating profit margin of cloud services significantly improved to 17%, increasing by 6 percentage points sequentially, while the market originally expected it to remain flat sequentially.

The short-term counter-cyclical improvement in cloud service profitability and the maintenance of high service profit margins, in Dolphin's view, somewhat illustrate how Google benefits from the AI transformation. However, it should also be noted that the recognition of infrastructure costs related to AI may not have been fully accounted for in Q3, following the small peak in investments that began in Q4 2022. Behind the increase in profit margins, the total operating expense growth rate of the cloud business in Q3 slowed from 20% in Q2 to 15%, and the overall company's depreciation cost growth rate also showed a sequential slowdown, which seems somewhat contrary to the high growth trend in capital expenditures this year: Q3 capital expenditures remained at $13.1 billion, a year-on-year increase of 62%, slightly exceeding market expectations.