UPDATED 16:37 EDT / FEBRUARY 03 2020

CLOUD

Google Cloud revenue jumps 53% – but not enough to offset Alphabet’s disappointing quarter

Alphabet Inc. today for the first time revealed numbers for two of its fastest-growing units, showing Google Cloud and G Suite revenue collectively jumped 53%, to $2.61 billion, and YouTube revenue rose 31%, to $4.72 billion.

But the newly revealed numbers came in a somewhat disappointing fourth-quarter earnings report. The Google LLC parent said it earned a profit of $10.67 billion, or $15.35 a share, in its fourth quarter. That’s up from last year’s $8.9 billion or $12.77 a share, thanks to carrying a 0% effective tax rate in the fourth quarter. Revenue rose 17%, or 19% in constant currency, to $46.08 billion.

Analysts surveyed by FactSet had expected a $12.57-a-share profit on revenue of $46.93 billion, meaning the search and advertising giant beat forecasts on profit but missed on revenue.

Alphabet shares fell close to 5% in after-hours trading following the results. In regular trading they had risen 3.5%, to $1,482.60 a share, staying above a $1 trillion market capitalization. Shares were up about 7% on the year after recovering from a third-quarter earnings disappointment last October.

The results were the first since Google Chief Executive Sundar Pichai (pictured) in early December took over the top spot at Alphabet overall from co-founder Larry Page. That elevation was widely seen as a positive by investors on the assumption that Pichai might be more parsimonious with Alphabet’s perennially money-losing “other bets” such as its healthcare unit Verily and its self-driving car unit Waymo, as well as more forthcoming on financials. “This change in the guard offers the most optionality for multiple expansion for the stock we have seen in years,” Pivotal Research Group analyst Michael Levine wrote in a recent note to clients.

In prepared remarks, Pichai cited the benefits of continued investment in “deep computer science,” including artificial intelligence, ambient computing and the cloud. “I’m really pleased with our continued progress in Search and in building two of our newer growth areas — YouTube, already at $15 billion in annual ad revenue, and Cloud, which is now on a $10 billion revenue run rate,” he said.

Rising cloud

Cloud computing remains a tiny portion of overall revenue, though it’s becoming enough of a contributor to compel Alphabet to reveal more of its size. It’s now separate from Alphabet’s “other revenues,” which include Google Play apps, smartphones and smart speakers. They rose 10%, to $5.26 billion.

We are really pleased with the momentum of Google Cloud,” Pichai said on a conference call with analysts. He said the company more than doubled deals of more than $50 million. “Definitely we are increasingly doing much larger deals,” he said.

Taken together, cloud and other revenues totaled $7.88 billion, far below analysts’ $8.65 billion consensus. That means hardware revenues probably accounted for much of the revenue shortfall, but the lower level of low-margin hardware also might have boosted the bottom line.

In particular, Pichai called out Google Cloud Platform, the company’s infrastructure piece. “GCP’s growth rate was meaningfully higher than Google Cloud’s overall,” he said, and it accelerated last year over 2018.

“Likely the cloud numbers looked ‘good enough’ for 2019 to be broken out, and certainly show good traction,” said Holger Mueller, an analyst with Constellation Research Inc. “But the cloud unit needs to grow faster than YouTube to show its relevance for Google overall. And then Google Cloud needs to catch up with fellow stalwarts AWS and Azure. Cloud is an economies-of-scale business that Google needs to scale up.”

Google’s cloud growth is faster than Amazon Web Services Inc.’s 34% growth reported last week, totaling nearly $10 billion for its fourth quarter. However, Google’s growth still doesn’t match that of No. 2 Microsoft Corp. Last week it reported better-than-expected earnings for its fiscal second quarter, with revenue from its Azure cloud infrastructure services up 62%, down from 76% the year before but ahead of some forecasts. The company got a big boost with the award in the quarter of the U.S. Department of Defense’s controversial Joint Enterprise Defense Infrastructure contract, which could be worth up to $10 billion over the next decade.

“It was good to see Google break out its cloud revenue, but even more transparency would help,” said Patrick Moorhead, principal analyst at Moor Insights & Strategy. “For instance, how much of that cloud revenue is G Suite versus infrastructure as a service and platform as a service? It does confirm that AWS is a giant which, based on its annualized number, is at $40 billion, four times larger than GCP.”

That said, Pichai took pains to note that Google Cloud Platform, the infrastructure side, is growing faster that G Suite, implying that Google’s growth rate at least comes close to Azure’s, if not beating it.

Despite Google Cloud Platform continuing to trail leader Amazon Web Services Inc. and hard-charging Microsoft by a wide margin, some analysts like its prospects under Chief Executive Thomas Kurian. “We have been constructive about GCP under Thomas Kurian, think this will have turned out to be a critical foundation year, and the narrative continues to improve in 2020 and beyond,” wrote Pivotal’s Levine.

Likewise, Global Equities Research analyst Trip Chowdhry noted the expansion of Google Cloud’s partner ecosystem to include established systems integrators such as Infosys, Accenture and Deloitte, a key to capturing more large enterprise customers. He also called out traction for Anthos, Google’s hybrid-cloud service that allows applications to run in any cloud or in on-premises data centers.

Indeed, Chief Financial Officer Ruth Porat said the unit had a backlog of $11.4 billion in 2019, almost all of which relates to Google Cloud. In particular, she mentioned “strong uptake” of Anthos in the quarter. Google has pledged to triple the number of salespeople on staff in the next three years.

Capital spending for the quarter totaled $6.05 billion, down from $6.73 billion in the third quarter and $7.08 billion a year ago. Much of that spending goes toward data centers for Google’s own operations and for its cloud services.

Alphabet’s “other bets” segment reported a $2.03 billion operating loss on revenue of only $172 million. A year ago, it reported a $1.33 billion operating loss on revenue of $154 million.

For all that, advertising remains the big driver for Alphabet’s business. In particular, ad revenues from search ads and YouTube together rose 18%, to $31.9 billion. “YouTube is growing strongly according to this report, and revenues are above where eMarketer had thought they were,” said eMarketer Principal Analyst Nicole Perrin.

Still, the ad business remains under something of a cloud because of ongoing investigations by various federal and state agencies looking into antitrust issues involving ads, bias in search, and the way Google manages its Android mobile operating software. Reuters today reported that Justice Department officials will meet Tuesday state attorneys general staff to discuss their probes. Amazon, Apple Inc. and Facebook Inc. all face their own investigations as well.

Photo: Maurizio Pesce/Flickr

A message from John Furrier, co-founder of SiliconANGLE:

Your vote of support is important to us and it helps us keep the content FREE.

One click below supports our mission to provide free, deep, and relevant content.  

Join our community on YouTube

Join the community that includes more than 15,000 #CubeAlumni experts, including Amazon.com CEO Andy Jassy, Dell Technologies founder and CEO Michael Dell, Intel CEO Pat Gelsinger, and many more luminaries and experts.

“TheCUBE is an important partner to the industry. You guys really are a part of our events and we really appreciate you coming and I know people appreciate the content you create as well” – Andy Jassy

THANK YOU