Once again, cloud services help lift Alphabet and Amazon earnings skyward

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Two bellwether technology giants, Alphabet Inc. and Amazon.com Inc., that are increasingly competing with each other in the fast-growing cloud computing market each reported better-than-expected first-quarter earnings today.

Alphabet, parent company of Google Inc., reported a net profit of $543 billion, or $7.73 a share, up from $4.21 billion or $6.02 a share a year ago. Gross revenues rose 22 percent, to $24.8 billion. The company said growth was driven on the advertising side by mobile search ads and YouTube ads, and in other categories such as Google Play apps and content, hardware and cloud.

Amazon posted a 41 percent jump in net profit to $724 million, or $1.48 a share, from $513 million or $1.07 a share a year ago. Sales rose 23 percent, to $35.7 billion. Operating income fell 6 percent, to $1 billion from a year ago. Amazon Web Services cloud revenue jumped 43 percent from last year, to $3.7 billion, while operating income shot up 47 percent, to $890 million.

Both reports, which were better than analysts expected, made investors happy, at least in trading after the market close. Amazon’s shares were up a little under 4 percent, after rising 1 percent in regular trading, to $918.99. Alphabet’s stock also was up a little over 4 percent, after rising a fraction of a point today, to $891.44 a share. Google’s shares had risen by 12 percent so far this year, Amazon’s by 21 percent.

Google CEO Sundar Pichai

Google CEO Sundar Pichai (Photo: Robert Hof)

Although cloud computing makes up a tiny portion of revenues at both companies, it figures heavily in the profits of one and the future of both. Virtually all of Amazon’s profits in recent quarters have come from cloud computing, offsetting losses or small profits in its massive retail operation. For Google, a late entrant in public cloud computing, gaining on Amazon Web Services and Microsoft Corp.’s Azure could be critical to staying ahead on many fronts in its wide-ranging businesses.

Analysts polled by FactSet had expected Alphabet’s net profit to fall from $7.50 a share a year ago to $7.38. Consensus forecast for revenue was a 20 percent rise from a year ago to $19.8 billion after payments to other websites to run its ads, or $24.2 billion in gross revenues. Google doesn’t report its cloud unit’s revenues.

Analysts on average had forecast that Amazon to post a net profit of $1.08 a share, up 5 percent from a year ago, or an adjusted $2.35, up from $2.20 a year ago, on $35.3 billion in revenue, up 21 percent. Amazon Web Services cloud revenues have been slowing down, rising 47 percent to $3.5 billion in the fourth quarter, from a 55 percent jump in the third quarter and 58 percent in the second quarter. Still, this quarter AWS slightly outpaced analysts polled by FactSet.

Alphabet doesn’t provide earnings guidance, but Amazon does. It expects second-quarter net sales between $35.25 billion and $37.75 billion, or up 16 percent to 24 percent from the year before, and operating income between $425 million and $1.075 billion, compared with $1.3 billion the year before.

Ads and cloud at Alphabet

Alphabet Chief Financial Officer Ruth Porat said during the earnings conference call that the largest growth in headcount came in the cloud operation. “Google Cloud Platform is one of the fastest-growing businesses across Alphabet,” she said.

Google Chief Executive Sundar Pichai also said the company has made a lot of progress with large companies such as HSBC and eBay Inc., which are using its cloud services. “There is a very strong recognition that we have pivoted to being a deep enterprise company,” he said. “We are engaging with the top levels of the company.”

Of course, Google’s dominant business is advertising, and there it has faced some other challenges recently, in particular criticism from big advertisers whose ads appeared on inappropriate YouTube videos, causing some to pull their budgets from the video site. Pichai said the company has applied machine learning to reduce the problem and expects the efforts to improve over time. “Advertisers have clearly noticed the changes we have made,” he said. Indeed, said Shar VanBoskirk, vice president and principal analyst at Forrester Research Inc., told SiliconANGLE, “Google certainly needs to fix it, but it isn’t really losing business, because there is nowhere ‘safer’ to go for the same reach and flexibility with ad formats.”

But Google’s relative position atop the digital advertising heap remains unchanged. Google and Facebook together account for virtually all of the growth in digital ads. Based on numbers released earlier this week by the Interactive Advertising Bureau, Pivotal Research Inc. analyst Brian Wieser reckons that Google and Facebook accounted for 77 percent of gross spending last year, up five percentage points from a year ago. Even more important, Wieser said, they captured 99 percent of industry growth. Facebook reports its first-quarter earnings next week.

For the near term, lower costs in research and development, sales and marketing and other areas relative to revenue cheered Wieser. “These figures provide us with some confidence that the company can continue to grow while protecting its margins and cash outflows,” he wrote in a note to clients after the report.

Nonetheless, Google faces numerous challenges in advertising, both in its core search business and beyond. For one, Van Boskirk said, intelligent agents will gradually eat away at Google’s lucrative search ads. More broadly, she added, “Advertisers are shifting away from quantity-based strategies and toward quality-based ones. This means that [Google] AdWords and programmatic ads — which emphasize reach — will over time give way to premium blended content/ad experiences that are being developed by media companies.”

Retail, Alexa and cloud at Amazon

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Amazon Web Services operating income (Source: Amazon)

Amazon has continued its hard charge on both the retail front, where it continues to take market share from brick-and-mortar stores, and in cloud computing, where it remains firmly atop the market thanks to its early start and relentless pace of product introductions and update, about three per day on average last year.

It also has made big, expensive forays into video, including its own series and a $50 million broadcast deal with the National Football League, and devices such as the smart speaker Echo that use the Alexa digital assistant. On the latter, Chief Financial Officer Brian Olsavsky said the company has invested in artificial intelligence, in particular deep learning neural networks that underly recent advances industrywide in speech and image recognition.

As for AWS, Olsavsky said Amazon would continue to invest, if it’s not obvious already, in developing new cloud products and services. “The innovation pace continues to accelerate,” he said.

It will need to, because Microsoft is hot on its tail with its Azure cloud. In its third-fiscal quarter earnings report today, Microsoft said Azure revenue surged 94 percent, more than double AWS’s growth rate. Trip Chowdhry, an analyst with Global Equities Research, said in a note to clients Thursday that he’s reducing his two- to three-year growth rate forecast for AWS to between 30 percent and 35 percent, from 40 percent to 46 percent.

Google and AWS are increasingly clashing in the cloud, most obviously at Snap Inc. The maker of Snapchat revealed before it went public in March that it had a $2 billion, five-year deal to use Google’s cloud. Then a few days later in an amended IPO filing, it said it also had a $1 billion deal with AWS.

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