Google’s Cloud Revenue Soars While Ad Biz Takes COVID-19 Hit

‘People are relying on Google services more than ever,’ says Sundar Pichai, CEO of Alphabet and Google. ‘There's a strong recognition of the value of our products, particularly in important and urgent moments.’

Google’s cloud revenue surged 52 percent to $2.77 billion in the first quarter, while the spread of the coronavirus significantly impacted the online search giant’s advertising business during the last few weeks of the period.

“There are two key aspects of our business that give us confidence about the future,” Alphabet and Google CEO Sundar Pichai said during an earnings call today. “First, as we saw after 2008, one of the strongest features of (Google) Search is that it can be adjusted quickly. It's relatively easy to turn off and then back on, and marketers see it as highly cost-effective.”

Google parent Alphabet also is a more diversified business than it was during the 2008 recession, Pichai said, noting Google Cloud’s growing business in the commercial and public sectors with Google Cloud Platform (GCP) and the more than 6 million paying customers of its G Suite collaboration and productivity tools including Gmail, Hangouts, Calendar, Currents and Docs.

Google Cloud’s annual revenue run rate now exceeds $11.08 billion.

“Once again, the growth rate of GCP was meaningfully higher than that of cloud overall,” said Ruth Porat, chief financial officer of Alphabet and Google. “GCP growth was led by our infrastructure offerings and our data and analytics platform. We're proud of the accelerated traction we achieved across sectors, including public sector and healthcare for disease monitoring and control, working with leading retailers on demand forecasting, working with companies across media and communications to enhance their customer service, and across industries on supply chain optimization.”

Google and YouTube advertising revenues climbed to $37.8 billion in the quarter that ended March 31, up from $33.61 billion in the prior-year period.

The first quarter was, in many ways, “the tale of two quarters," according to Pichai.

"For our advertising business, the first two months of the quarter were strong,” he said. “In March, we experienced a significant and sudden slowdown in ad revenue. The timing of the slowdown correlated to the locations and sectors impacted by the virus and related shutdown orders. As the impact of COVID-19 came into view, we delayed some ad launches and prioritized supporting our customers as many adjusted their strategies.”

Alphabet beat Wall Street’s revenue estimates for the first quarter, led by the performances of Google Search, YouTube and Google Cloud. Its revenue increased 13 percent to $41.16 billion in the first quarter, compared to $36.34 billion in revenue for the prior-year period. Analysts had expected Alphabet to generate $40.17 billion in revenue. Net income increased to $6.83 billion or $9.87 per share, from $6.65 billion or $9.50 per share a year ago, missing analysts’ forecast of $10.76 per share.

“It’s a challenging moment for the world,” Pichai said, noting the coronavirus crisis is the first major pandemic taking place in a digital world.

The most pressing concerns of small and large businesses right now is business continuity and solving for issues including employee safety, dramatic falls or surges in demand, supply chain and managing remote workforces, according to Pichai.

“People are relying on Google services more than ever,” he said. “There's a strong recognition of the value of our products, particularly in important and urgent moments.”

Google has seen a significant rise in search activity. In the United States, coronavirus-related search activity at its peak was four times greater than during the peak of the Super Bowl. People are spending significantly more time on their Android apps, with downloads of apps from Google Play rising 30 percent from February to March. YouTube watch time also has significantly increased, particularly livestreams. And 100 million students and educators are using Google Classroom, double the number from the beginning of March. Google also has seen a massive increase in demand for Chromebooks, with analysts reporting a 400 percent year-over-year increase during the week of March 21, Pichai said. Schools and businesses also are using Google’s video conferencing platform Meet, which is adding roughly 3 million new users each day and has seen a 30-fold increase in usage since January.

Looking forward, Alphabet is continuing to invest in its long-term priorities, but being thoughtful in the short term, according to Pichai.

“Given that we are faced with a global crisis of uncertain depth and duration, we have been focused on taking steps to enhance efficiency, including slowing the pace of hiring and some categories of marketing expense, as well as further enhancing machine utilization,” Porat said.

While Porat in the last quarter indicated Google’s headcount growth rate would be slightly higher than the 20 percent growth of 2019, Google now anticipates a deceleration in headcount growth that should start to be visible in the third quarter and continue into the fourth quarter.

“Although we are focused on these and other steps to moderate the overall pace of investment, we remain committed to the long-term opportunities for which we are well positioned,” she said. “So we will continue to invest in these areas, including Search, machine learning and Google Cloud.”

Alphabet also now anticipates a modest decrease in its total capital expenditures this year.

“Compared with last year, the biggest change in our outlook is a reduction in global office facility investments due to both the need to pause most of our ground-up construction and fit-out in response to COVID-19 and our decision to slow down the pace at which we acquire office buildings,” Porat said. “Overall, we anticipate technical infrastructure investments to remain at roughly the same level as in 2019. with relatively more spent on servers than on data center construction.”

Google’s stock increased 7.98 percent in after-hours trading on Tuesday to $1,331.