Google Cloud misses revenue estimates – and it's your fault, wanting smaller bills

Keeping old servers alive is more lucrative than the G-Cloud

Google Cloud remains profitable, but the search and ads giant's rent-a-server side-hustle has struggled as customers seek to reduce costs.

Parent company Alphabet detailed [PDF] its financial performance for the quarter ending September 30, 2023, on Tuesday. It revealed revenue of $76.7 billion – an 11 percent year on year jump. Of that, $59.7 billion of revenue came from advertising-related activities. Operating margins of 28 percent delivered net income of $19.7 billion.

Google Cloud brought in $8.4 billion of revenue – up from $6.9 billion for Q3 in 2022. The stated $266 million of quarterly operating income improved on 2022's $440 million loss.

But the G-cloud is less lucrative than Google's decision to extend the life of the servers and networking kit used to run its services – by 24 and 12 months respectively. In Q3 the decision delivered a reduction in depreciation expenses of $977 million and an increase in net income of $761 million.

On the earnings call, Alphabet CEO Sundar Pichai lamented that Google "definitely started seeing customers looking to optimize spend" in the cloud. "We leaned into it to help customers, given some of the challenges they were facing," he added, labelling it a "factor" in Google missing its previous forecast of $8.7 billion in quarterly cloud revenue.

"Optimization" of cloud spend is code for customers asking for cost reductions and/or help in identifying wasteful sprawl of cloud resources. AWS and Microsoft have also admitted that their customers want optimization assistance, as cost-cutting has become a priority.

Another concerning outcome for the Google cloud was that its $266 million operating income number was down from $395 million in the previous quarter – when revenue was $370 million lower.

Alphabet president, chief investment officer and chief financial officer Ruth Porat pointed to "fundamental strength" across the megacorp – "driven by meaningful growth in Search and YouTube," but mere "momentum in Cloud."

CEO Pichai observed that Google is seeing increased uptake of its cloudy AI, and opined that should help the G-Cloud to post better numbers in future quarters. The versions of Google's Bard AI services baked into its Workspaces personal productivity suite – which contributes to Google Cloud revenue – have "great initial traction."

The conglomerate noted "an increase in general and administrative expenses, reflecting the impact of charges related to legal matters," without explicitly saying if its antitrust case in the US is the reason for the rise.

One terrifying number revealed in the results is 70 billion – the number of daily views for YouTube Shorts, Google's short video riposte to TikTok. With only eight billion humans on Earth, that's a lot of time spent watching short vids – especially when you consider TikTok and Meta's social networks also pump out plenty of this stuff.

Alphabet's share price took a dive from around $138 to $131 in after hours trading – a drop attributed largely to concerns about the G-Cloud's performance. ®

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