Ramping Google Cloud Investments Take Toll On Alphabet Profits

The industry's third-largest provider is scaling its sales and technical workforce under Google Cloud CEO Thomas Kurian as it looks to take on the industry's two leaders.

Alphabet is pouring cash into Google Cloud to catch up to industry leaders Amazon Web Services and Microsoft, Google's holding company revealed Monday in its third-quarter financials.

That investment in cloud, the top driver of expanding headcount at Google, dragged down the Mountain View, Calif.-based internet giant's profits in the quarter that ended Sept. 30, but should add fuel to an already fast-growing business.

Google CEO Sundar Pichai raised the cloud division first in his prepared remarks during the earnings call with investors. "We saw customer momentum across multiple areas under Thomas' leadership," he said of Google Cloud CEO Thomas Kurian.

[Related: Pichai: Google Cloud Annual Revenue Run Rate Exceeding $8B]

"Momentum has been great. Thomas has continued to invest across the board," Pichai said, adding Kurian has "focused a lot on scaling up sales partner operational teams."

In addition to tripling its cloud sales force and hiring new engineers, Google is building out its physical infrastructure around the globe.

Google just announced its seventh U.S. cloud region, launching in 2020 in Nevada; as well as its seventh European region that will come online in Poland, Pichai noted.

But that investment took a toll on the company's earnings picture.

Capital expenditures climbed above $6.7 billion in the quarter, Alphabet CFO Ruth Porat said, from $5.28 billion the previous year. Profits subsequently fell from $9.2 billion in the same quarter of the previous year to $7.1 billion in the recently ended one.

A FactSet survey of analysts estimated earnings of $12.28 per share, but Alphabet disappointed by only delivering $10.12 per share.

Pichai told investors that G Suite, Google's office productivity software, and Google Cloud Platform, have become "very synergistic" businesses.

There are many "G Suite customers now with whom we are having GCP conversations and vice versa," Pichai said.

G Suite "continues to be very differentiated," Pichai said, and will see more success under recently installed leader Javier Soltero.
He also referenced Google's partnership with the private cloud leader.

"We continue to extend our cloud solutions through partners, including a new solution that enables customers to run VMware workload on GCP for the first time," Pichai said.

Alphabet doesn't break out Google Cloud revenue, instead reporting those financials as part of its “other” category, which is mostly driven by Google Cloud, but also covers hardware and Google Play app store.

That category scaled to $6.43 billion in Q3 revenue, compared to $4.64 billion in the same period for the previous year, for a 39 percent gain.

In July, Pichai said Google's cloud division was taking in $8 billion in revenue. While he didn't update that number, he said Google will continue to periodically give investors "visibility" into its cloud business.

Alphabet's overall revenue came in at $40.5 billion. That 20 percent year-over-year growth slightly outpaced analyst expectations of $40.3 billion.

On the mixed results, the stock fell from a close of $1,288.98 on Monday to 1,268.00 at the time of this publication.