Alphabet has published its Q3 2023 financial results, showing Google Cloud has fallen behind its revenue estimate even though it has been investing heavily in AI recently.
Overall, the company reported stronger-than-expected revenue of $76.69 billion, up 11 percent year over year, but Google Cloud’s business has evidently cast a shadow over this for investors, with stock prices falling in after-hours trading.
Google Cloud’s revenue was $8.41 billion, up 22 percent, despite analysts predicting it would scoop $8.64 billion, following the company’s investments in AI, including Duet AI for Google Workspace and Bard, a rival to ChatGPT.
Direct competitors like Microsoft and Amazon have performed much better, however, which also implies the industry is not to blame. Azure’s revenue rose 29 percent, for example, nearly three percent higher than its estimate.
Ruth Porat, Chief Financial Officer at Alphabet, kept her explanation of Google Cloud’s relative tumble brief on the company earnings call:
“GCP revenue growth remained strong across geographies, industries and products, although the Q3 year-on-year growth rate reflects the impact of customer optimisation efforts.”
‘Customer optimisation efforts’ could refer to just about anything, including the job cuts it made in January this year, in which ten thousand Google employees were laid off based on results from a performance ranking algorithm.
Hundreds more were let go from its recruiting segment in September 2023, as it also announced plans to cut back on hiring. Even last week, workers from its Waymo and Verily businesses were made redundant.
There have also been changes to Alphabet’s c-suite, with Porat herself transitioning from Chief Financial Officer to the newly created title of ‘President and Chief Investment Officer’ as soon as a CFO replacement has been found.
The problem is that its key competitors were similarly impacted by the economic slump in the technology industry. In fact, Microsoft also announced it would be laying off ten thousand employees in the same month, having cut a further 1,000 in October 2022
The ‘optimisation efforts’ may also include Google’s spending $8.06 billion on capital expenses, which Porat said was mainly for servers and data centres due to an increase in AI computing investments.
Could the answer simply be that its AI investments have not been as successful as those of Microsoft, Amazon, and the many other companies vying for a place in this buzzing industry?
Porat did not try to downplay its focus on AI. She told investors: “We are pleased with the ongoing customer engagement with GCP and Workspace and the potential benefit of our AI solutions, including infrastructure and services such as Vertex AI and Duet.
“We continue to invest aggressively given the significant potential we see while remaining focused on profitable growth. In terms of expenses and profitability, we’re pleased with our operating performance.
“As we have repeatedly stressed, we remain focused on durably reengineering our cost base to create investment capacity to support our growth priorities, most important of which is with AI.”
Fortunately, the bigger picture for Google’s parent company, Alphabet, was far from doom and gloom.
The company’s positive overall results were bolstered by its $59.65 billion in ad revenue for the quarter, which beat analyst predictions and was more than five billion dollars higher than it was a year ago.
YouTube advertisements reported revenue of $7.95 billion, which is also ahead of its $7.07 billion revenue last year.
It seems there is no escaping AI this year, however, as even the release of ‘YouTube Shorts’, featuring videos of up to sixty seconds, was accompanied by AI-powered video editing tools.
