As it closes in on $25 billion in calendar 2022 revenue, Google Cloud posted a memorable Q3 with revenue up 38%, its lowest loss as a percentage of revenue ever, and unflinching commitments from Alphabet executives for ongoing investment.
As if that weren’t enough, Google Cloud in Q3 registered a truly extraordinary achievement: It grew its cloud revenue from Q2 to Q3 by the same amount — $600 million — as Microsoft. (You can read all about that in “Cloud Shocker: #3 Google Matches #1 Microsoft in Cloud Revenue Growth.”)
Now, since Microsoft’s cloud business overall is 4X larger than Google Cloud’s — Microsoft could finish calendar 2022 with cloud revenue of $100 billion — that’s further proof that Google Cloud had a dynamite Q3.
While that high rate of growth is one of Google Cloud’s top priorities, the company also needs to continue proving it’s on a clear path to profitability. And once again, the Q3 results demonstrate the significant progress Google Cloud is making on that front.
To show that progress, I’m going to offer three Google Cloud numbers for each of the past five quarters: its revenue, its loss, and that loss as a percentage of revenue.
- Q3 2021: $4.990 billion, ($644 million), 12.9%
- Q4 2021: $5.541 billion, ($890 million), 16.1%
- Q1 2022: $5.821 billion, ($931 million), 16.0%
- Q2 2022: $6.276 billion, ($858 million), 13.7%
- Q3 2022: $6.868 billion, ($699 million), 10.2%
As I described in a recent analysis, the Google Cloud formula is clear: In a business like the cloud with extremely high costs of entry and expansion — data centers, R&D, engineering and support teams, sales teams, and more — the only way to break even and then begin generating profits is to relentless scale the business.
That is exactly what Google Cloud’s been doing as its quarterly growth rates have averaged about 40% since parent Alphabet began breaking out revenue figures for Thomas Kurian’s cloud unit. In parallel, as revenue’s been climbing rapidly, the Q3 loss of only $699 million shows that the high-scale formula is working. (And as for that “only” word, yes, I realize $699 million is a lotta scratch, but that number has to be seen in the proper context of the revenue figure of $6.9 billion.)
On Alphabet’s Oct. 25 earnings call, CEO Sundar Pichai offered this overview of the cloud business.
“I’ve long shared that cloud is a key priority for the company,” Pichai said in his prepared remarks.
“The long-term trends that are driving cloud adoption continue to play an even stronger role during uncertain macroeconomic times. Google Cloud helps customers solve today’s business challenges, improve productivity, reduce costs, and unlock new growth engines.”
A moment later, after listing customer wins in the various parts of the Google Cloud business, Pichai said, “I’m proud of the trust and enthusiasm our customers are placing in Google Cloud.”
Later in the call, Alphabet CFO Ruth Porat pointed to “significant growth in both infrastructure and platform services” as well as “strong revenue growth in Google Workspace . . . in both seats and average revenue per seat.”
Shortly after that, Porat offered a forward-looking perspective on why Alphabet is bullish on Google Cloud.
“Customers globally are adopting our products and services to digitally transform their businesses,” Porat said.
“We are excited about the opportunity, given that businesses and governments are still in the early days of public cloud adoption and we continue to invest accordingly.
“We remain focused on the longer-term path to profitability,” Porat said, and “have an effort underway to ensure we redeploy investments against our most compelling opportunities.”
While that last comment is a tad indirect, I think it’s safe to assume that Porat’s making a couple of key points that I would interpret this way:
- Alphabet is very aware of the need for Google Cloud to become profitable; and
- Alphabet is eagerly pumping more money into Google Cloud to fuel the growth that will lead to that promised profitability land (“we redeploy investments against our most-compelling opportunities”).
In the Q&A portion of the call, Porat offered a more-expansive comment on how Alphabet perceives Google Cloud and its potential.
“Yes, we are pleased with the ongoing momentum — it’s across a wide range of industries and geographies,” she said.
“And it really comes back to the team’s focus on helping [customers] solve unique business issues and innovate in new areas as they digitally transform.
“I think more to your question, and we talked about this last quarter, in some cases, certain customers are taking longer to decide, and some have committed to deals with shorter terms or smaller deal sizes, which we attribute to a more challenging macro environment.
“Some are impacted due to reasons that are specific to their business. But overall, as you can see from the results here again, we’re pleased with the momentum in Cloud and do continue to be excited about the long-term opportunities. So that’s why I made the comment that we do continue to invest meaningfully in this business.”
And just what might “invest meaningfully” translate to? For Q3, Alphabet posted revenue of $69.1 billion and a net income of $13.9 billion — so Google Cloud should not be hampered by a cash crunch.
Quite the opposite: The comments from Pichai and Porat clearly indicate that the only factor that could impact that willingness to “invest meaningfully” is Google Cloud’s ability to sustain the hypergrowth-level momentum it has demonstrated over the past couple of years.
In parallel, Alphabet expects that just as it’s willing to prime the Google Cloud pump, so too must Google Cloud be able to show that it can deploy those investments aggressively but also wisely and responsibly. Because there’s no doubt that while Porat and Pichai have clearly bought in fully to Kurian’s vision for scaling the company aggressively, they also expect him to fairly soon begin kicking in some profits as well.
“We’re still focused very much so on the path to profitability and free cash flow strength here, but we are continuing to invest in the business,” Porat said in the Q&A session.
“And this fits within Sundar’s overall comments as we’re looking at how we prioritize. And they’re certainly making sure they’re [Google Cloud is] focused on every element within their business.
“But fundamentally, to the heart of your question, we’re continuing to invest here.”
Revenue is rising significantly, losses are diminishing, and the sales org has demonstrated it can slug it out with Microsoft on growth.
Sounds like a perfect recipe for ongoing “meaningful” investments. Well done, Google Cloud!
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