Alphabet Rides Cloud Demand, Ad Sales to Record $74.6 Billion Quarterly Revenue, CFO to Take New Role

The largest component of Alphabet's second-quarter capital spending was for servers and a "meaningful investment" in AI computing.

By Reuters | Updated: 26 July 2023 12:14 IST

Photo Credit: Reuters

Alphabet's shares jumped 8 percent in after-hours trading

Highlights

Alphabet rolled out AI products at its annual I/O developer conference
It revamped its search engine to include generative AI
Generative AI tech can create text, images and video

Alphabet's second-quarter profit exceeded Wall Street expectations on Tuesday and the Google parent announced that its long-time CFO, Ruth Porat, would assume a new role while the company sought a new finance chief.

Alphabet's results were helped by steady demand for its cloud services and a rebound in advertising. The shares jumped 8 percent in after-hours trading. Shares of rival Microsoft were down slightly after it also reported results on Tuesday, while shares of Meta Platforms, a company also highly dependent on ad sales, rose as much as 2 percent.

"Not only did Google deliver fantastic earnings per share, exceeding expectations at a time when investors were questioning its ability to keep up with other tech giants amid the AI frenzy, it also did so by a considerable margin," said Thomas Monteiro, senior analyst at Investing.com. "This strongly indicates that a new growth phase for the giant is likely underway."

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He added, "Google has finally consolidated itself as a leading force in the highly-disputed cloud sector and now has room to focus its expansion in the AI field."

Porat, hired in 2015, is one of Silicon Valley's most prominent female executives and oversaw tremendous growth at Alphabet. She will become chief investment officer and president starting Sept. 1 and lead 2024 planning while her successor is sought.

Porat was hired from Morgan Stanley, where she was finance chief. In her new role, she will oversee the company's so-called Other Bets portfolio, the unit for more risky hardware and services ventures, as well as help manage the company's global investments.

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Advertisers, who make up a big share of Alphabet's revenue, have pulled back on spending precious dollars on untested platforms, helping the Google parent as well as Facebook owner Meta Platforms.

But Alphabet's second-quarter results are sure to please investors concerned over a broader advertiser pullback following the meteoric growth of Web services during the pandemic, as consumers returned to physical retail.

Silicon Valley has been buzzing over generative artificial intelligence software that can give long-winded responses to user queries and is predicted to be the next leap forward for Big Tech. Alphabet rolled out AI products at its annual I/O developer conference in May and it revamped its search engine to include generative AI.

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The new AI technology comes at a cost: the largest component of Alphabet's second-quarter capital spending was for servers and a "meaningful investment" in AI computing, Porat said in a conference call.

Advertising is coming to the company's revamped search, Chief Executive Sundar Pichai told analysts on the call. Alphabet is testing what formats are effective and where to place ads inside of its AI-powered search.

Presently, 80 percent of advertisers use at least one AI-driven search product, Chief Business Officer Philipp Schindler said on the call.

The company plans to integrate generative AI into other products such as Gmail, Google Photos, and its Android mobile operating system. Generative AI tech can create text, images, and videos that resemble what people produce.

Still, the results released on Tuesday show that ad sales are still king. Investors punished social media company Snap on Tuesday for its disappointing ad sales in the quarter. Revenue at Google Cloud, which is among the biggest cloud service providers, rose 28 percent to $8.1 billion (roughly Rs. 66,403 crore), besting expectations of $7.75 billion (roughly Rs. 63,539 crore), and maintaining roughly the same rate of growth as the first quarter. Microsoft's Azure revenue rose 26 percent, ahead of the growth estimate from Visible Alpha.

Analysts and industry experts have said they expect cloud business growth to pick up toward the end of the year, with quarter-ended June being the trough as macro uncertainty begins to clear.

Investors expect AI to become a major growth driver for cloud businesses within a year, with Microsoft's Azure leading the pack followed by Amazon.com's AWS and Google Cloud.

Ad sales for Google's YouTube video service unit rose 4.4 percent to $7.67 billion (roughly Rs. 62,882 crore). Alphabet reported a net profit of $1.44 (roughly Rs. 118) per share for the April-June period, compared with estimates of $1.34 (roughly Rs. 109) per share.

Revenue for the quarter stood at $74.6 billion (roughly Rs. 6,11,608 crore), compared with estimates of $72.82 billion (roughly Rs. 5,97,014 crore), according to Refinitiv data.

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