Alphabet just banked $3B by stretching life of its servers

Q4 results reveal AI is the answer to – or the reason for – everything: a cloud profit, wobbly ads, boosting subscriptions

Google's parent company, Alphabet, has revealed it banked $3 billion by extending the working life of its hardware.

Alphabet first decided to extend the life of its kit in 2021, when it stretched the life of servers from three to four years, and networking kit from four to five years. In 2023 it decided both types of hardware could run for six years before replacement.

In its full year results, posted Monday, Alphabet revealed the payoff from that decision: in the final quarter of 2023, it reduced depreciation expenses by $983 million, and increased net income by $765 million. Across the full year, depreciation dropped $3.9 billion and net income rose $3.0 billion.

With net income coming in at $20.7 billion for the quarter and $73.8 billion for the year, those old boxes have made a significant contribution to Alphabet's bottom line.

But they're not helping Alphabet to deliver AI services. CFO Ruth Porat revealed Q4 capital expenditure of $11 billion, "driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by datacenters."

Q3 capex was $7.6 billion, and Porat explained the jump "reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers, and governments globally and the long-term growth opportunities that offers."

She therefore predicted "In 2024, we expect investment in capex will be notably larger than in 2023" – a year in which Alphabet spent $32.25 billion on property and equipment.

Alphabet boss Sundar Pichai reckons that investment will pay off. He praised growth in Google's subscription business – which now delivers $15 billion of annual revenue – and teased a future AI subscription service based on the forthcoming Gemini Ultra model.

"This infrastructure is also key to realizing our big AI ambitions. It's a major differentiator for us. We continue to invest responsibly in our datacenters and compute to support this new wave of growth in AI-powered services for us and for our customers," Pichai declared, adding that AI investments aren't impacting Alphabet's ongoing effort to "durably reengineer our cost base."

That work will see the org spend $700 million on "severance-related expenses" in Q1 alone, on top of $2.1 billion spent for the same purpose during FY 2023. Alphabet also spent $1.8 billion on "exit charges" after quitting some offices during 2023.

Q4 revenue landed at $86.3 billion – up from $76 billion in 2023. Full-year revenue of $307.4 billion eclipsed 2022's $282.8 billion.

Google Cloud posted $9.2 billion revenue and $864 million profit for the quarter – a new high that handily topped 2022's Q4 total of $7.3 billion revenue with a $186 million loss. Quarterly advertising revenue grew $6 billion across the year, to $65 billion.

That, however, was a smaller number than some expected, and Alphabet shares slid in after-hours trading.

Maybe AI will fix that. Chief business officer and senior veep Philipp Schindler noted that Google is "starting to put generative AI in the hands of more and more businesses" and that early tests of the tech suggest advertisers – especially small businesses – are 42 percent more likely to publish effective ad campaigns with the aid of binary brainbox tech. ®

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