Google Cloud Begins Profitability Era: 5 Huge Q2 Earnings Takeaways

Google Cloud reports record sales and operating income during Q2 2023. Here are the five biggest highlights from Google’s financial earnings report on Tuesday.

Google Cloud appears to be entering its era of profitability after the world’s third largest cloud company had been operating in the red for years.

The Mountain View, Calif.-based cloud computing company generated a record operating income of $395 million during its second quarter of 2023. During the same quarter one year ago, Google Cloud reported an operating loss of $590 million.

This means Google Cloud improved its operating income by nearly $1 billion year over year in Q2 2023.

“We continue to invest aggressively while remaining focused on profitable growth,” said Ruth Porat, Google’s chief financial officer, regarding Google Cloud during the company’s second quarter earnings report on Tuesday.

Google Cloud was able to achieve its most profitable quarter in the company’s history thanks to strong sales growth, reducing the pace of hiring new employees and momentum in artificial intelligence.

Google Q2 2023 Earnings

Before jumping into the five biggest second quarter 2023 financial earnings takeaways regarding Google Cloud’s profitability, here’s a quick look at Alphabet’s financial results which shows Google Cloud is growing much faster than its parent company.

Alphabet generated a total of $74.6 billion in revenue during the second quarter, representing a 7 percent sales increase year over year. Meanwhile, Google Cloud increased year-over-year revenue by 28 percent, approximately four-times faster than Alphabet.

Alphabet and Google CEO Sundar Pichai touted Google Cloud consistency throughout his company’s second quarter earnings call with analysts on Tuesday night.

“I’m definitely excited about what’s ahead [for Google Cloud],” said Pichai. “All the investments we’re doing in AI across Alphabet—including the work we’re doing in Google DeepMind, and Google research and on Gemini and so on—are directly applicable to cloud as well.”

CRN breaks down the five biggest Google Cloud takeaways from Google’s Q2 2023 earnings report last night as well as the most interesting comments from CEO Pichai and future Google President Ruth Porat.

Google Cloud Begins Profitability Era After $1.9 Billion Loss In 2022

Since nearly its inception, Google Cloud has been operating at a loss. The company has historically generated hundreds of millions of dollars in operating losses every quarter. In fact, in 2022, Google Cloud reported an overall operating loss of over $1.9 billion for the year.

In Q1 2022, Google Cloud generated an operating loss of $706 million, followed by a loss of $590 million in Q2 2022, then a $440 million loss in Q3 2022 and a $186 million operating loss in Q4 2022.

However, that all appears to be changing this year.

For the first time in the company’s history, Google Cloud turned a profit of $191 million in Q1 2023. The second quarter of 2023 proved that the first quarter was not just a fluke.

Google Cloud generated operating income of $395 million in the second quarter of 2023.

“Google Cloud saw continued growth with Q2 revenue of $8 billion, up 28 percent, and an operating profit of $395 million,” said Pichai. “With Google Cloud, we’ve been really embracing an open architecture. We’ve embraced customers wanting to be multi-cloud when it makes sense for them.”

Google’s Slowdown In Hiring Helped Profits

Earlier this year, Google said it was “meaningfully slowing the pace” of hiring in 2023. Although the company is still investing in onboarding top engineering and technical talent, Google’s hiring pace during Q2 2023 helped grow profits.

“In terms of expenses and profitability, we remain very focused on durably reengineering our cost base,” said Google’s Porat on Tuesday.

“Most evident to date are the actions we have taken to reduce the pace of headcount growth, including the workforce reductions we announced in the first quarter and a slower pace of organic hiring, in part given our focus on reallocating talent from within to fuel our growth priorities,” she said.

Google’s hiring slowdown came after the company unveiled in January that it would be laying off 12,000 employees. Google hasn’t announced any large layoff rounds since.

Gen AI Boosting Google Cloud Momentum

Generative AI was top of mind for Google CEO Pichai during the company’s Q2 2023 earnings report Tuesday night.

“When I think about it long term, I view the AI opportunity as expanding our total addressable market and allows us to win new customers,” said Pichai.

“Our AI-optimized infrastructure is a leading platform for training and serving generative AI models,” he said. “More than 70 percent of gen AI unicorns are Google Cloud customers, including Cohere, Jasper, Typeface and many more.”

CEO Pichai said his company’s new generative AI capabilities is leading to an explosion of demand for Google Cloud.

“We are seeing strong demand for the more than 80 models—including third party and popular open source in our Vertex [AI], search and conversational AI platforms, with the number of customers growing more than 15-[times] from April to June,” said Pichai. “The scale of investments that we can directly bring to cloud now—we have over 80 models across Vertex [AI], Search and conversational AI—and we are taking all of them and translating it into deep industry solutions. So I’m excited about it.”

Google’s gen AI capabilities are also expanding the company’s partner ecosystem, “with hundreds of ISVs and SaaS providers such as Box, Salesforce and Snorkel, and the world’s largest consulting firms like Accenture and Deloitte,” Pichai said. “They’ve collectively committed to train more than 150,000 people on Google Cloud generated AI.”

With Google injecting generative AI into Google Cloud’s most popular products, the future is looking brighter than ever for the cloud company.

Google Cloud Smashes Wall Street Expectations; $32 Billion Run Rate

Google Cloud bested Wall Street’s revenue projections of approximately $7.8 billion for Q2 2023 by generating sales of $8.03 billion. This undoubtedly helped drive Google’s stock price to jump 7 percent in after-hours trading on Tuesday night.

Google Cloud’s $8 billion in Q2 2023 sales was an increase of 28 percent year over year compared to $6.28 billion in Q2 2022. This is similar to Google Cloud’s 28 percent year over year sales increase in Q1 2023.

The cloud company currently has a $32 billion annual run rate, the largest in its history.

Google Cloud sales includes infrastructure and platform services, collaboration tools, and other services for customers. Google’s cloud arm generates revenue from fees received for Google Cloud Platform (GCP) services, Google Workspace communication and collaboration tools, and other enterprise services.

Ruth Porat Promoted To President; Search On For New CFO

Ruth Porat has played a key role in turning around Google Cloud’s profitability numbers as Google’s longest-serving chief financial officer.

Porat will assume a newly created role of president and chief investment officer of Alphabet and Google, effective September 1, 2023.

“In her new role, Ruth will strengthen our collaboration with policy makers and shape our corporate investments to have maximum economic impact for people and economies around the world,” said Google CEO Pichai.

Porat’s new president and chief investment officer role will have her responsible for Google’s investments in its ‘other bets’ portfolio, work closely with Pichai, and the company’s investments in countries and communities around the world. She will also focus on engagement with policymakers and regulators regarding employment, economic opportunity, competitiveness, and infrastructure expansion.

“I’m excited about this new role and the opportunity to engage with leaders globally to unlock economic growth via technology and investment,” said Porat. “I’m committed to Google’s continued growth and ensuring that our diverse global investments are supported with strong partnership to create opportunities for people and communities, everywhere.”

Porat will continue to serve as CFO, including leading the company’s 2024 and long-range capital planning processes, while Google searches for her successor.