Alphabet Inc beats revenue estimates as AI fuels cloud growth in Q1

By Julia Love and Davey Alba
 

Alphabet Inc. reported first-quarter revenue that exceeded analysts’ expectations, buoyed by growth in its cloud computing unit. 
 

The Google parent generated sales, excluding partner payouts, of $67.6 billion for the three months that ended on March 31, surpassing the $66.1 billion expected on average by analysts, according to data compiled by Bloomberg. Net income was $1.89 per share, compared with Wall Street’s estimate of $1.53 per share.

The company also said it would pay a dividend of 20 cents a share, its first ever, and repurchase an additional $70 billion in stock. The shares jumped 13 per cent in extended trading.

Like other Big Tech companies, Alphabet has been plowing money into developing artificial intelligence, a strategy that has helped drive demand for its cloud services, which saw revenue rise 28 per cent in the first quarter. Google is a distant third in the cloud computing market, trailing Amazon.com Inc. and Microsoft Corp., but the company’s prowess in AI could help it close the gap. 

“The main thing is, we are really excited about the benefit from AI for our cloud customers,” Chief Financial Officer Ruth Porat told journalists on a call. “We saw an increasing contribution from our AI solutions.” The Google Cloud results “really reflect broad strength across the industry,” she added.

Google has developed much of the underlying technology being used in the AI boom today, and has woven it into products from web search to its suite of enterprise software from Gmail to Google Docs. 

Yet ever since OpenAI’s ChatGPT was released in late 2022, Google has been battling the perception that it’s lagging behind Microsoft and OpenAI in rolling out new generative AI tools. The arrival of popular chatbots such as ChatGPT  — which answers questions in a conversational tone rather than providing lists of links to other websites — has posed a threat to Google’s two-decade stranglehold on search. The company is struggling to compete in generative AI without cannibalising its core profit machine. 

Google has marshaled teams across the company to reassert its lead in AI, yet its early efforts have been marred by embarrassing blunders, including a scandal over how its AI model Gemini handled race that forced the company to suspend image generation of people. 

Investors have shown they are excited about the prospects of AI but want tech companies to continue to focus on revenue and profit in the meantime. Meta Platforms Inc., which competes with Google in AI and also digital advertising, suffered its worst stock decline since October 2022 after reporting that it would spend billions of dollars more this year on AI efforts and projecting weaker revenue for the current quarter.

Google said it spent $12 billion in the first quarter on capital expenditures, mostly through investment in its technical infrastructure such as servers and data centers. Porat said she expects quarterly capex throughout the year to be about or above the same level. 

Developing tools for generative AI is very expensive, but Alphabet Chief Executive Officer Sundar Pichai said he is “very, very confident we can manage the cost of how to serve these queries.” While there are questions about how Alphabet will be able to monetise its AI capabilities, Pichai said he’s “comfortable and confident that we will be able to manage the monetisation transition here well as well.”

Unlike Meta, Google’s latest results show that the world’s biggest digital advertising machine is continuing to power growth at the company, thanks to search and YouTube. Search advertising revenue rose 14 per cent to $46.2 billion and remains the core of Google’s very lucrative business. But the company is facing heightened competition there, too. 

Meta has been seeding AI tools throughout its advertising business and Snap Inc. has also undergone a total revamp of its ad business to improve ad targeting. The digital ad market is recovering from a post-pandemic slump, buoyed by the Olympics Games this summer, but Google is increasingly vying for those ad dollars with Meta and Snap. 

“Google’s core search business also did well, but its future is not assured,” said Emarketer analyst Evelyn Mitchell-Wolf. “A verdict is expected in the US DOJ’s related antitrust trial in the coming quarter, and the incorporation of AI-generated components into Google’s main search interface will arguably be the biggest change to the search advertising market since its inception.”

If consumers gravitate from Google search to the new wave of chatbots, that could imperil the company’s search advertising juggernaut, which is expected to generate nearly $200 billion in revenue this year and the bulk of Alphabet’s profit.

Cloud has been a bright spot for Google after it first became profitable early last year. Many young AI startups are founded by former Google employees, creating a strong pipeline of cloud clients.

Google Cloud reported sales of $9.6 billion. The unit’s profit was $900 million, well ahead of analysts’ projections of $672.4 million. 

“For years, Google Cloud was usually a weak spot during Alphabet’s earnings calls,” said Lee Sustar, a principal analyst with Forrester. “These latest results show that Google Cloud’s AI offerings not only got enterprise customers to take another look, but spend some serious money.” Google Cloud has shown it is a strong unit on its own, without having to rely on revenue from the tech giant’s ad businesses to cover for its operating losses as it has in years past, Sustar added.

Despite the hard questions that AI raises for the search business, “there’s no question, however, that Google’s AI ventures are helping Cloud, which has been a consistent growth driver,” Mitchell-Wolf said.

YouTube, the wildly popular video site, reported $8.1 billion in revenue, compared with analysts’ average estimate of $7.7 billion. The unit returned to form last quarter after a series of disappointing results that showed the toll of advertisers’ pullback in spending. 

“YouTube, in particular, seems to have benefitted from live sports investments, ad blocking crackdowns, and improvements in Shorts monetisation, resulting in its strongest growth rate in two years,” Mitchell-Wolf said.

Alphabet’s Other Bets, an eclectic collection of nascent businesses including the self-driving car effort Waymo and the life sciences firm Verily, reported $495 million in revenue while losing $1 billion. Investors have closely scrutinised the unprofitable unit for years, and earlier this year the company’s famed moonshot factory, X, shed dozens of jobs as it pivots to focus on spinning out companies. 

Porat, who was named Alphabet’s president and CIO last year, is expected to focus more on overseeing these investments after the company hires a new CFO to replace her in that role.

To free up resources to invest in artificial intelligence, Google has conducted rolling rounds of layoffs that have struck teams including hardware, engineering, and the moonshot lab X. Google reported a total of 180,895 employees, down from 190,711 in the year-ago quarter.