AI boom helps drive Google Cloud to first profit ever

It seems Wall Street Once again underestimated the cloud. Google Cloud posted its first-ever profit in calendar Q1. Meanwhile, Microsoft’s cloud business grew more than 20% to account for over half of its revenue in the company’s revenue in its fiscal Q2 2023. Both companies beat consensus estimates for earnings and revenue.

Alphabet’s consolidated revenues rose 3% to $69.8 billion, with cloud revenue jumping 28% to $7.5 billion. In a surprise shift, the cloud unit also swung from a $706 million loss in the year ago quarter to an operating profit of $191 million.

On an earnings call, CEO Sundar Pichai pointed to a recent uptick in interest in generative artificial intelligence (AI) as a key driver of its cloud growth.

“This has been an important moment as pretty much every organization is thinking about how to use AI to drive transformation. And so across the board, from start-ups to large companies, they are engaging with us. And so I view it as a point of inflection there as well,” he said.

Pichai added that Google Cloud now counts 60% of the world’s 1,000 largest companies as customers and noted the volume of cloud deals over $250 million it has secured has grown more than 300% over the past three years.

But it was not immediately clear if Google Cloud’s profitability would follow a linear growth path going forward. Alphabet CFO Ruth Porat stated on the call that Google Cloud saw “slower growth of consumption” in Q1 as customers continued to optimize their cloud workloads in the face of an uncertain economic climate. That uncertainty, she said, is expected to linger.

“We will continue to invest to support long-term growth, in particular, given the opportunities we see delivering AI capabilities to our customers,” she said. “As I have said in the past, you shouldn’t extrapolate from quarter-to-quarter, but we are very pleased to be at this level and are continuing to focus on profitability and long-term value creation here.”

Microsoft also feels the AI boom

Meanwhile, over at Microsoft, overall cloud revenue grew 22% year over year to $27 billion, accounting for just over half of the company’s $52.7 billion in revenue. Intelligent Cloud revenue of $21.5 billion was up 18% and Azure revenue grew 31% (Microsoft didn’t provide a dollar figure).

Like Pichai, Microsoft CEO Satya Nadella also highlighted AI as a boon for Azure.

“As customers select their cloud providers and invest in new workloads, we are well positioned to capture that opportunity as a leader in AI,” he said. “We have the most powerful AI supercomputing infrastructure in the cloud.”

Additionally, he touted Microsoft’s strength in the hybrid computing space, noting Azure Arc now has more than 12,000 customers – double the number it had a year ago.

That said, Nadella and CFO Amy Hood acknowledged the same cloud optimization trend Porat noted. Nadella characterized the pullback as a temporary adjustment to right size pandemic workloads before the next round of applications moves to the cloud.

“I don’t think we’re going to take two years to optimize. But we’re going to take this year to optimize and then, as we optimize, the new projects start. The new project starts don’t start instantly at the peak usage. They start and then they scale,” he said.

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