Google Cloud posts first-ever operating profit despite slowing growth

Google Cloud, the cloud computing arm of Alphabet, has turned profitable at an operating level for the first time ever, despite fears of macroeconomic uncertainty.  

Google Cloud posted an operating income of $191 million for the quarter ended March, compared with an operating loss of $706 million for the corresponding period last year.

The unit’s revenue grew 28% to $5.82 billion during the quarter, resulting in an operating margin of 2.6%.

“We have consistently grown top line revenue and improved annual operating margin, and we continue to do so this quarter. Our growth has come from our deep relationships with large enterprises, a strong partner ecosystem, and our product leadership,” Alphabet CEO Sundar Pichai said during an earnings call.

“Over the past 3 years, GCP’s annual deal volume has grown nearly 500%, with large deals over $250 million growing more than 300%. Nearly 60% of the world’s 1,000 largest companies are Google Cloud customers, and many leading startups and millions of small and medium enterprises use Google Cloud,” Pichai said.

Google Cloud’s mounting losses for the past few years could be attributed to the continued investments, especially in data centers. The company has been making these investments to compete better with larger rivals Amazon Web Services and Microsoft Azure.

In March, Google Cloud announced plans to open a second Middle Eastern region in Qatar. In October last year, Google announced it would open new regions across Austria, Greece, Norway, South Africa, and Sweden to supplement new regions announced in August for New Zealand, Malaysia, Thailand, and Mexico.

Reduced customer expenditure slowing revenue growth

Alphabet’s cloud computing arm continues to see a slowdown in revenue growth over the past few quarters.

For the March quarter, revenue growth for the unit came in at 28% year-on-year, four percentage points slower than the December quarter, which saw 32% year-on-year growth. The previous sequential quarter that ended in September registered an ever stronger growth of 38% year-on-year.

“In Q1, we continued to see slower growth of consumption as customers optimized GCP costs reflecting the macro backdrop, which remains uncertain,” Alphabet Chief Financial Officer Ruth Porat said during the earnings call.

The company, according to CEO Pichai, has been trying to help enterprise customers optimize their spending during this period of uncertainty.

“I would add, that we are leaning into optimization. I mean there is an important moment to help our customers, and we take a long-term view. And so, it’s definitely an area we are leaning in and trying to help customers make progress in their efficiencies where we can,” Pichai said during the call.

Google Cloud is growing much faster than its parent Alphabet. For the March quarter, Alphabet posted total revenue of $69.78 billion with Search continuing to be the largest contributor with a $40.35 billion share. Revenue for the entire company was up only 3% year-on-year.

Alphabet, which laid off 12,000 employees in the beginning of the year, said it will continue to hire top engineering and technical talent while investing in areas of priority.