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Google Cloud revenues rise, but so do its losses as Alphabet sees growth slow

Stuart Lauchlan Profile picture for user slauchlan July 27, 2022
Ad revenue slowdowns are hitting the consumer end of the business, but moments like this are opportunities for reflection, argues Alphabet CEO Sundar Pichai.

Sundar Pichai

Alphabet saw its profits slip as overall growth rates slowed down in Q2, although the enterprise cloud business continues to see revenue rise, but also turned in larger losses.

To put things into context, Google’s parent still turned in a $16 billion profit, down 14% year-on-year, on revenues that were up 13% year-on-year to $69.7 billion. Google Cloud saw a 36% increase in revenue to $6.3 billion, but turned in a loss of $858 million, up from a comparable $591 million last year.

Alphabet CEO Sundar Pichai pointed to the cloud business having passed a $6 billion quarterly revenue mark for the first time as a positive indicator of future prospects for the business:

First, we continue to lead in the data cloud market because we unify data lakes, data warehouses, data governance and advanced machine learning into a single platform that can analyze data across any cloud. Companies like S.C. Johnson, Northwell Health and the Golden State Warriors choose Google Cloud for our strength in data analytics. Our capabilities helped Swiss Air optimize its flight operations. They’re also helping ENGIE explore ways to optimize wind energy management and Ford, to create smarter factory floors.

Second, companies like BetaBank and Mayo Clinic choose our open cloud infrastructure to modernize their IT systems on our cloud, at the edge or in their data centers. Our infrastructure scales to help customers like Deutsche Telekom modernize its network, Wipro to modernize its core systems, and Garvan Institute of Medical Research to process 14,000 genomes in under two weeks. Our multi-cloud strategy remains a differentiator for customers like Elevance Health, formerly known as Anthem and AMD.

Ads slow down 

Elsewhere there’s been a slowing down of ad spend that’s hit the consumer end of the company, particularly YouTube. Chief Business Officer Philipp Schindler argued that the situation isn’t as grim as some commentators might suggest:

Despite the pullback from some advertisers, we really believe YouTube remains well positioned to benefit from the shift to digital video, maybe first on brand. It’s worth calling out that this was first year participating in the Upfronts, which is really exciting and really a testament to YouTube’s evolution, and we were very pleased with our strong growth and upfront commitments.

Customers tell us they see value in YouTube’s reach and the ability to drive results…We’re also continuing to give advertisers unique and creative storytelling opportunities and the ability to lean into very precise KPIs and we recently rolled out some very critical measurement tools.

On the direct response side, we still think there’s a lot of runway to address commercial intent on YouTube between video action campaigns and app campaigns and product feeds and new live commerce features, where we’re testing a number of different things across live commerce. So, we’re excited about the opportunities here, especially to connect brands with creators.

We’re also seeing advertisers by YouTube at both ends of the funnel, which I talked about earlier, giving advertisers the ability to drive reach and relevance and action is really where YouTube excels. So, the big picture long term remained very encouraged by the opportunity for innovation at brand and DR and across YouTube.

Gain from pain 

Pindar also pitched an argument that the current macro-economic uncertainties in the market provide opportunity as well as pain:

As I said to the company, I think it’s a good time to sharpen our focus. Personally, I find moments like these clarifying. It’s a chance to digest and make sure we are working on the right things as a company with taking a long-term view, making sure we are continuing to invest in deep technology and computer science and doing differentiated work, and gives a chance to assess everything we are doing with the critical lens and reallocate resources to our most critical priorities. So, it’s a constrained optimization problem. I think it gives us a chance given the strong -- given a few years of strong growth to double down and focus, and we’re going to be very disciplined in terms of how we will approach it. But our focus on the long-term areas - be it AI, be it cloud and other critical areas - will continue.

He added:

All of us are reacting to quite a varying set of dynamics, and it’s tough to summarize it because the underlying factors are different and they vary by maybe geography and verticals. But, there is some commonality to it in terms of the macro environment. There’s definitely something we are looking at and want to be more disciplined as we go forward. So, that’s the higher-level theme. I think in terms of underlying areas, pretty much I’m focusing my time on what are the right set of things to do with a longer term view?  And I do think as a company, when you’re in growth mode, it’s tough to always take the time to do all the re-adjustments you need to do, and moments like this gives us a chance. So, I view it as an opportunity.

My take

You do see a varying mix of some customers impacted in terms of their ability to spend, some customers just slightly taking longer times, and maybe in some cases, thinking about the term for which they’re booking and so on. But I don’t necessarily view it as a longer term trend as much as working through the macro uncertainty everyone is dealing with.

Pichai’s comments on the cloud sales cycle are well made. The macro-economic uncertainties at the moment hit Microsoft’s numbers this week. All eyes will now be on Meta later today to see how its ad revenues are - or are not - holding up in comparison to Alphabet.

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