Google Cloud is struggling to catch up to big rivals Microsoft and AWS, despite growing 38% in the third quarter. Alphabet, the parent company of Google, on Tuesday released figures below analysts’ expectations, in terms of both revenue and profit, for its third fiscal quarter of 2022.
But while the group’s revenue growth fell at +6% between July and September, that of Google Cloud reached +38% year-on-year and resulted in $6.9 billion in billings. Its subsidiary therefore proves to be an essential support for Alphabet. “I have long said that the cloud is a priority for the company,” said Sundar Pichai, CEO of Alphabet, during the presentation of the group’s results to financial analysts. “The long-term trends driving cloud adoption play an even more important role in times of macroeconomic uncertainty,” he said.
Google Cloud offers IaaS, PaaS and SaaS services as well as collaborative tools to name a few. The operator is the third largest provider of public cloud infrastructure services in the world, with 8% market share in the second quarter of 2022, according to Canalys. Nonetheless, it lags far behind its big rivals Microsoft Azure and AWS, which captured 24% and 31% of industry revenue respectively in the same period. To make matters worse, the latter continue to strengthen their dominant positions.
“Google Cloud would need to experience revenue increases of more than 50% per year to catch up. The cloud market still retains a lot of room for growth, and this is what ensures the growth of the overall turnover of Microsoft and Amazon”, observes Ray Wang, analyst at Constellation Research.
Microsoft also released its quarterly financial results on Tuesday. They report a 35% increase in revenue from Azure and other cloud services, while these had appreciated by 50% in the same period last year. This attenuated increase is partly due to the soaring dollar which cost the publisher’s cloud activity 7 points of quarterly growth.
Google Cloud is the only bright spot on Alphabet’s results
Google, for its part, is facing severe pressure on its advertising revenue, which reduced its overall growth to just 6% in the third quarter. We are far from the 41% increase recorded a year earlier. With billings up 38%, driving 10% of Google’s revenue, Google Cloud is the only bright spot in Alphabet’s latest tally. However, Google has every incentive to roll up its sleeves before the public cloud operator’s growth begins to slow.
“The quarterly growth of Google’s cloud activities was stronger than that of Microsoft in this area [Editor’s note: +20%]. But Google Cloud is expected to grow even stronger, given its small size compared to Microsoft and AWS,” said Pareekh Jain, CEO of EIIRTrend & Pareekh Consulting. “It should capitalize on the opportunities that arise in under-penetrated geographies. It should also become profitable over the next few quarters, taking tough decisions like shutting down Google Cloud IoT,” he continues.
According to Synergy Research Group, the global market for cloud infrastructure services (PaaS, IaaS and hosted private cloud services) recorded revenue of $54.7 billion in the second quarter of 2022, and $205 billion in 12 rolling months.
Google continues to invest heavily in the cloud
Although the value of its billings increased, Google Cloud also saw its losses widen during its third fiscal quarter. They reached $699 million, compared to $644 million last year. They reflect the fact that the operator continues to invest in new data centers and their equipment to expand its global footprint. Earlier this month, Google announced plans to launch new cloud regions in six new countries: Austria, Czech Republic, Greece, Norway, South Africa, and Sweden. This will bring the presence of its own infrastructure to 41 regions worldwide. The aim is to counter similar expansion plans from AWS, Microsoft and Oracle, which are also investing heavily to grow.
“Our total cost of goods sold was $31.2 billion in the third quarter, up 13%, primarily due to other revenue costs, which were $19.3 billion, up 20%. The largest expenses are those associated with data centers and other operations, followed by those associated with hardware,” Alphabet CFO Ruth Porat said during the results presentation. “We are still very focused on the path to profitability and the importance of free cash flow, but we continue to invest in the business. The majority of capital expenditure continues to be for our technical infrastructure, where servers have really been the main beneficiary,” she said.
Google tried to cut losses across all of its business units, including Google Cloud. While the operator’s quarterly losses increased year-on-year, they sequentially declined in the cloud sector, from $931m in the first quarter to $858m in the second quarter of this year. “Google Cloud takes profitability seriously and cuts some services that don’t scale and aren’t profitable. In this logic, they have, for example, announced the discontinuation of Google Cloud IoT in the last quarter,” said Pareekh Jain.
“However, the cloud market is now seeing its growth slow after the hypergrowth it has experienced in recent years. Businesses face challenges caused by inflation, and concerns about the macroeconomic environment are also impacting their spending decisions. Additionally, some of the cloud investments they have made in the past have not delivered the cost savings to customers,” adds Pareekh Jain.
These macroeconomic headwinds have already started to affect Google Cloud, Ruth Porat acknowledged, noting that some customers take longer to decide on new investments while others prefer short-term projects to larger ones.