Alphabet Earnings: Google Cloud Revenue Run Rate Tops $12B

Cloud revenue grew 43 percent as parent company Alphabet recorded its first-ever quarterly revenue decline since going public in 2004.

Google Cloud revenue grew 43 percent in the second quarter, as parent company Alphabet recorded its first-ever quarterly sales decline since going public in 2004 thanks to reduced customer advertising spending amid the coronavirus (COVID-19) pandemic.

Google Cloud’s revenue -- which includes sales from Google Cloud Platform (GCP), the G Suite productivity tools and other enterprise cloud services -- reached just more than $3 billion in the three months that ended June 30, up from $2.1 billion in last year’s second quarter and $2.77 billion in this year’s first quarter.

The annual revenue run rate for Google Cloud – the third largest cloud computing provider behind No. 1 Amazon Web Services and No. 2 Microsoft Azure – is now approximately $12.03 billion after exceeding $11.08 billion in the first quarter.

GCP maintained the strong level of revenue growth it delivered in the first quarter, and that growth was again meaningfully above that of Google Cloud overall, according to Ruth Porat, Alphabet’s and Google’s chief financial officer. GCP growth was again led by Google Cloud’s infrastructure offerings and data and analytics platform, she said.

“We are pleased with the traction we‘re having with large customers who are making multi-year commitments with us,” Porat said during an earnings call with analysts today, after the market closed. “This is reflected in the strength of our backlog, which ended the quarter at $14.8 billion, substantially all of which relates to Google Cloud. This performance is a result of the investments we’re making into the cloud go-to-market organization.”

The lower Google Cloud revenue growth in the second quarter compared to the 52 percent increase in the fourth quarter reflects the fact that G Suite lapped a price increase introduced in April last year, according to Porat.

“G Suite maintained healthy growth in average revenue-per-seat, as well as in seat growth, which does not include customers who took advantage of our free trials as they shifted their employees to work from home,” she said.

The Mountain View, Calif.-based Alphabet exceeded analysts’ overall revenue expectation, reporting $38.29 billion in second-quarter revenue, a 2 percent drop from last year’s second quarter, when revenue had increased 19 percent to $38.9 billion.

“The macroeconomic environment caused by the pandemic created headwinds for our business,” said Sundar Pichai, CEO of Google and Alphabet.

Second-quarter net income rung in at $6.95 billion or $10.13 in earnings per share (EPS), compared to net income of $9.9 billion in the same quarter last year or $14.21 in EPS.

“The decline in our Search revenues put significant pressure on profitability, which was further impacted by our ongoing investments for long-term growth,” Porat said.

Analysts, on average, had expected $37.34 billion in Alphabet evenue and EPS of $8.23.

“We are cautiously encouraged by our results for the second quarter, although mindful of the fragile global economic environment,” Porat said. “Across each region, we saw gradual improvement in revenues in the quarter, with some differences reflecting product mix. Our advertising revenues gradually improved through the quarter, and our non-advertising revenue lines maintained their strong performance, particularly Google Cloud and Play.”

Alphabet is seeing two distinct trends as businesses embrace the future of work, Pichai said: The future of business will be more digital, and virtual collaboration will be critical to adapt and succeed in the changing global landscape.

“Customers are choosing Google Cloud to either lower their costs by improving operating efficiency or to drive innovation through digital transformation -- brands like Keurig Dr Pepper, Deutsche Bank, Lowe‘s, Telefonica, Orange,” Pichai said. “And we are helping many government agencies deliver care for their citizens, including the states of Oklahoma and New York here in the U.S., and Italy and Spain in Europe.”

Revenue from Google Search dropped 10 percent to $21.31 billion, from $23.64 billion in the same period last year, but trends improved as the quarter progressed, according to Porat.

“We saw a gradual return in user search activity to more commercial topics throughout the quarter, followed by an increase in spending by advertisers,” she said. “This resulted in an improvement in year-on-year search revenue trends during the quarter, with search revenues essentially flat to last year by the end of June.”

Revenue from YouTube ads grew to $3.81 billion, a 6 percent increase from the $3.6 billion recorded in last year’s second quarter, driven by ongoing substantial growth in direct response and offset by a continued decline in brand advertising, which then moderated towards the end of the quarter, Porat said.

Total Google advertising revenue fell to $29.86 billion in the second quarter, from $32.49 billion last year.

Alphabet continues to expect a modest decrease in the level of its total capital expenditures in 2020 compared with last year.

“This is particularly due to our decision to slow the pace at which we acquire office buildings in the near term, as we focus on reimagining the optimal work environment,” Porat said. “This also reflects the slower pace of ground-up construction for both our office facilities and data centers due to COVID-19.”

Alphabet had 127,498 employees at the end of the second quarter, compared to a headcount of 103,459 at the end of the first quarter.

“Although we still expect the pace of headcount growth to decelerate somewhat in 2020, we‘re continuing to hire aggressively in priority areas like cloud,” Porat said. “We still expect that headcount additions will be seasonally higher in Q3, as we bring on new graduates.”

Pichai and the CEOs of Apple, Amazon and Facebook yesterday were grilled by U.S. congressmen during a hearing on their online platforms’ market power and dominance held by the House Committee on the Judiciary’s Subcommittee on Antitrust, Commercial and Administrative Law.

“On the regulatory front, we‘ve obviously been operating under scrutiny for a while, and we realize -- at our scale -- that’s appropriate, and we have engaged constructively across jurisdictions,” Pichai said. “From my standpoint, I’m confident in the approach we take -- our focus on users and the evidence in almost all areas we operate in (that) we expand choice or lower prices. Overall, there’s a very fast pace of innovation, so it’s dynamic and competitive. Having said that, obviously we will operate based on the rules. And so, to the extent there are any areas where we need to adapt, we will. I think the scrutiny is going to be here for a while, and so we are committed to working through it.”

Alphabet’s stock, which closed at $1,538.37 per share today -- up by $14.86 or 0.98 percent -- hit $1,550 in after-hours trading as of 7:05 p.m.