Google Cloud turns in its first quarterly profit, but growth slows as the macro-economic crisis tightens

Sundar Pichai

It’s been a long time coming, but Google Cloud has chalked up its first quarterly profit, turning in a Q1 operating income of $191 million on revenue of $7.45 billion, compared to a year-ago loss of $706 million on revenue of $5.82 billion.

Sundar Pichai, CEO of parent company Alphabet, declared himself pleased with the continued momentum showed by the cloud business: 

Our disciplined expansion of our product road map and go-to-market organization has helped to build one of the largest enterprise software companies in the world. We have consistently grown top line revenues and improved annual operating margins, and we continue to do so this quarter. Our growth has come from our deep relationships with large enterprises, a strong partner ecosystem and our product leadership. Over the past 3 years, GCP’s [Google Cloud Platform] annual deal volume has grown nearly 500%, with large deals over $250 million growing more than 300%. Nearly 60% of the world’s 1,000 largest companies are Google Cloud customers, and many leading start-ups and millions of small and medium enterprises use Google Cloud.

We have also built a strong partner ecosystem. Over the last 4 years, the number of Google Cloud Partner certified practitioners around the world has increased more than 15x. The largest global system integrators have built 13 dedicated practices with Google Cloud compared to zero when we started. And today, more than 100,000 companies are part of our Google Cloud Partner Advantage program. Our growth is also driven by our product leadership. We are bringing our generative AI advances to our cloud customers across our cloud portfolio. Our PaLM generative AI models and Vertex AI platform are helping Behavox to identify insider threats, Oxbotica to test its autonomous vehicles and Lightricks to quickly develop text-to-image features.

AI was inevitably cited by Pichai as another area of enormous opportunity for Alphabet: 

I’ve compared it to the successful transition we made from desktop to mobile computing over a decade ago. Our investments and breakthroughs in AI over the last decade have positioned us well. In our last call, I outlined three areas of opportunity: continuing to develop state-of-the-art large language models and make significant improvements across our products to be more helpful to our users; empowering developers, creators and partners with our tools; and enabling organizations of all sizes to utilize and benefit from our AI advances. 

Progress has been made across all three areas, beginning with the roll-out of the Bard conversational AI service, Pichai went on: 

A number of organizations are using our generative AI large language models across Google Cloud platform, Google Workspace and our cybersecurity offerings. For years, we’ve been focused on making Search even more helpful, from Google Lens to multi-Search to visual exploration in Search, immersive view in Maps, Google Translate, to all the language models powering Search today, we have used AI to open up access to knowledge in powerful ways. 

We’ll continue to incorporate generative AI advances to make Search better in a thoughtful and deliberate way. We’ll be guided by data and years of experience about what people want and our high standards for quality. And we’ll test and iterate as we go because we know that billions of people trust Google to provide the right information. As it evolves, we’ll unlock entirely new experiences in Search and beyond just as camera, voice and translation technologies have all opened entirely new categories of queries and exploration.

My take

The profit reported by the cloud business will encourage Alphabet bosses, although it remains considerably behind its two main rivals in terms of marketshare. In addition, growth is slowing with Q1 coming in four percentage points behind Q4.  CFO Ruth Porat cautioned: 

In Q1, we continued to see slower growth of consumption as customers optimized GCP costs reflecting the macro backdrop, which remains uncertain. 

She added: 

The point we are trying to underscore is there is uncertainty in the economic environment. And so we saw some headwind from slower growth of consumption with customers really looking to optimize their costs given that macro climate.

But nonetheless, a significant quarter for Google Cloud, with revenue up 28.1% year-on-year.  Overall, Alphabet reported revenue of $69.79 billion, up 2.6% year-on-year, with net income coming in at $15.05 billion.  Google Services revenue of $61.96 billion was only up slightly on last year’s $61.47, while ‘Other Bets’ revenue was sharply down year-on-year, from $440 million to $288 million.