Alphabet quarterly cloud revenues surpass $10B for first time

Alphabet, the parent of Google, had solid results in its second quarter, with revenues of US$85 billion, driven by Search, as well as Cloud, which the company said exceeded US$10 billion in quarterly revenues for the first time.

Despite surpassing expected earnings, Reuters reported today that Alphabet stock shed 5.08% by late afternoon, despite “a second-quarter earnings beat, as investors focused on an advertising growth slowdown and the company flagged high capital expenses for the year.”

Those capital expenses, said company CEO Sundar Pichai during a quarterly earnings call on Tuesday, are essential, particularly when it comes to cloud and AI development. He told a group of financial analysts that the company will “continue to invest in designing and building robust and efficient infrastructure to support our efforts in AI, given the many opportunities we see ahead.”

Alphabet CFO Ruth Porat said that, for the Google Cloud Platform (GCP) segment, which includes infrastructure and platform services, collaboration tools and other services for enterprises, “revenues were $10.3 billion for the quarter, up 29%, reflecting first significant growth in GCP, which was above growth for cloud overall and includes an increasing contribution from AI. And second, strong Google Workspace growth, primarily driven by increases in average revenue per seat. Google Cloud delivered operating income of $1.2 billion and an operating margin of 11%.”

Among those on the earnings call was Eric Sheridan, a stock analyst with Goldman Sachs, who asked Pichai during a Q&A session how he is seeing AI actually get adopted, implemented, and what it potentially could mean for the strategic positioning of Alphabet’s cloud business.

“If you take a look at our AI infrastructure and generative AI solutions for cloud across everything we do, be it compute on the AI side, the products we have through Vertex AI, Gemini for Workspace and Gemini for Google Cloud, et cetera, we definitely are seeing traction,” Pichai said. “People are deeply engaging with Gemini models across Vertex and AI studio. We now have over 2 million developers playing around with these things, and you are seeing early use cases.”

The company, he said, “is driving deeper on unlocking value in AI, which I am very bullish will happen, but these things take time. But if I were to take a longer-term outlook, I definitely see a big opportunity here.”

Another question came from Ross Sandler, a stock analyst with Barclays, who asked Pichai about his thoughts on Alphabet’s AI capex cycle and, further to that, whether the “AI industry is close to or far away from hitting some kind of wall on foundation model improvement in AI training, based on the lack of availability of new data to train on.”

Pichai replied, “When we go through a curve like this, the risk of under-investing is dramatically greater than the risk of over-investing for us.”

As for hitting a wall, he said, “we are all pushing very hard,” but despite that, there are going to be efforts made to “push the boundaries of these models.” That said, “there is enough optimization that we are all doing, which is driving constant progress in terms of the capabilities of these models.”

Alphabet segments financial results into three groups: Google Services (products and services such as ads, Android, Chrome, devices and Google Maps), Google Cloud, and Other Bets, which the company describes as a “combination of multiple operating segments that are not individually material. Revenues are generated primarily from the sale of healthcare-related services and internet services.”