Google delivers first-ever cloud profit, easing pressure on its declining ad business
Shares of Google LLC’s parent company Alphabet Inc. rose almost 2% in extended trading today after it delivered first-quarter financial results that topped expectations. Google’s cloud computing business notably recorded a first-ever profit, following years of multimillion-dollar investments and losses.
The company reported a first-quarter net income of $15.05 billion, up from a profit of just $16.44 billion a year earlier. Earnings before certain costs such as stock compensation came to $1.17 per share, above Wall Street’s forecast of $1.07 per share. Revenue for the period topped $69.79 billion, just ahead of the $68.9 billion expected by analysts.
After almost two decades of near-constant double-digit revenue growth and business expansion, Alphabet has in recent quarters found itself struggling to grow above the low single digits. With fears of a global recession refusing to go away, advertisers have been pulling back on their online marketing budgets, wreaking havoc with Google’s primary source of revenue.
As such, the profit from Alphabet’s Google Cloud unit is a timely boost for the company. It’s the first time since Alphabet began reporting metrics for the division three years ago that it has been able to show a profit. The unit reported $191 million in operating income on $7.45 billion in revenue in the quarter. One year earlier, it delivered a $706 million loss on sales of $5.82 billion.
The cloud business unit includes Google Cloud Platform, which rents out servers, storage and various services for other companies to build and run software. Also counted in the total is revenue from Google Workspace, the company’s productivity software. Google Cloud has picked up some major customers over the years, with recent additions including Deutsche Bank AG, PayPal Holdings Inc. and United Parcel Service of America Inc.
Google Cloud has been fighting tooth and nail to win over major enterprises and government agencies as the information technology industry slowly shifts from traditional data centers to cloud computing services. Cloud has been a major source of profit for its biggest rival, Amazon Web Services Inc., every quarter since 2014. It’s not clear if the No. 2 player in cloud, Microsoft Corp., is profitable or not because it doesn’t report profitability figures for its Azure cloud division.
Alphabet, led by Chief Executive Sundar Pichai (pictured), first reported its cloud revenue in 2020 and the unit has bled money ever since then. However, last week the company said in a filing with the U.S. Securities and Exchange Commission that it’s restating operating income for cloud and other business segments.
That change resulted in lower losses in both 2021 and 2022. For instance, Google Cloud’s fiscal 2022 fourth-quarter loss was revised from $480 million to a loss of just $186 million as a result of the change. It’s likely that without the restated numbers, Google Cloud would still be running at a loss.
“Certain costs associated with corporate initiatives supporting consumer-facing activities, previously reflected in unallocated corporate costs, are now allocated to Google Services; and centrally-managed shared research and development activities, including our shared developer tools, are now allocated based on an updated measure of the relative benefit derived from the services,” Alphabet’s filing stated. “As a result of these changes, more of the previously unallocated corporate costs are allocated to our segments, and more of certain previously allocated costs are allocated to our consumer-facing Google Services products and less to Google Cloud enterprise products.”
Analysts told SiliconANGLE that shareholders likely won’t put too much emphasis on the way Alphabet restated income for its cloud unit and changed the way it is allocating certain costs.
“Though those changes likely contributed to the quarter’s overall profitability, they represent a small part of the company’s larger effort,” said Charles King of Pund-IT Inc. “Overall, Alphabet appears to be returning to sustainably profitable form. It is also in far better shape than companies that pursued announced multiple layoffs, like Meta.”
Constellation Research Inc. analyst Holger Mueller said Google Cloud’s profit is a key milestone and should help boost the company’s confidence somewhat, fulfilling a forecast it made last year. “The fact that Google Cloud’s profit came a little earlier due to changes in its cost accounting gives a little pause for thought, but then again it could be argued that Alphabet is simply learning how to allocate its expenses more efficiently,” he said. “Investors will now be looking carefully to see how quickly Alphabet is able to grow its cloud business in the coming quarters.”
The surprise cloud profit helped to make up for Alphabet’s declining ad revenue, which beat expectations at $54.55 billion but was lower than one year earlier. Within that segment, Google Search and other revenue came to $4036 billion, up from $39.62 billion one year earlier, but YouTube ad revenue fell slightly to $6.69 billion.
In response to the lower ad revenue, Alphabet this year announced the most extreme job cuts in its history. It said in January it would be laying off almost 6% of its workforce, or about 12,000 staff. That was followed by further cuts to items such as employee services and equipment. For instance, most employees will not receive high-end laptops anymore, but rather will have to make do with more affordable Google Chromebooks.
The layoffs announced in January came with a $2.6 billion charge that was billed this quarter, hurting Alphabet’s overall profit.
Alphabet is also facing pressure in the rapidly emerging artificial intelligence business, where the popularity of chatbots such as OpenAI LP’s ChatGPT has been perceived as a threat to its dominance of the internet search industry. The company has responded with its own AI chatbot Bard but the reception has been less than enthusiastic.
Photo: Techlearn easy/Flickr
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