Google Cloud cut its Q4 operating loss almost in half to $410 million as it balances the need to continue delivering superb experiences to its customers with the heightened urgency to accelerate what a top Alphabet executive called the “march to profitability.”
Viewed through the lens of operating loss as a percentage of revenue, Google Cloud has delivered some big progress on that march:
- a year ago, in Q4 of 2021, the operating loss was $890 million on revenue of $5.54 billion, which equates to 16% of revenue; and
- for the just-reported Q4 of 2022, the operating loss was $480 million on revenue of $7.32 billion, or 6.6% of revenue.
During the Q&A session of Alphabet’s Feb. 2 earnings call, CFO Ruth Porat was asked to describe “the factors that need to be solved in order to get pretty nice profitability out of” Google Cloud. Here are the key points from her reply:
Investing ahead of huge opportunity. “We’ve really been investing ahead of our revenues given the growth in the opportunity overall and the desire to ensure that we’re equipped and able to support customers across segments and around the globe. And so there’s been meaningful investment to position ourselves to really have the momentum that the team has continued to deliver.”
Leadership “extremely focused” on being profitable. “That being said, they are, as both Sundar and I have noted, extremely focused on the path to profitability and every element of that.”
Leveraging new approaches from across Alphabet. “Some of the items that I noted that benefit Alphabet generally most certainly are relevant here for cloud as well. Everything from our efficiency with our technical infrastructure, which we’re very excited about — all the efforts they’re doing there and more broadly.”
Ensuring customer outcomes and experiences remain superb. Those investments have been made “to ensure, first and foremost, given the scale of the opportunity and the speed with which it’s moving, that we’re positioned to be present with our customers, to provide them with the analytics, the skills, and the capabilities that are needed to build for long-term growth.”
Break-even point is approaching. “We’re at a position now where we’ve meaningfully closed the gap to profitability but still are working through as we continue to invest for growth, while narrowing what this is on our march to profitability.”
Porat reiterated the path-to-profitability mantra in a related question as well, mentioning initiatives focused on the top as well as bottom lines: “As we’ve said, in cloud we remain very focused on the path to profitability. That’s a revenue and margin driver,” Porat said.
Her point about the significance of continuing to drive high growth reveals one of the big challenges Google Cloud CEO Thomas Kurian and his team face: While Google Cloud’s growth rate in Q4 a year ago was 46% and in Q1 of 2022 was 44%, the moderation of that expansion to 32% in the just-reported Q4 means that Google Cloud cannot simply grow its way out of the red.
That was reflected in a comment Porat made in her prepared remarks when she made this point about Google Cloud’s business: “In Q4, we saw slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop.”
With its 32% Q4 growth number, Google Cloud remains the third-fastest-growing company in the Cloud Wars Top 10, trailing only Oracle (cloud revenue up 43% for the quarter ended Nov. 30) and SAP (cloud revenue up 33% in Q4).
Relative to its two much-bigger cloud-infrastructure rivals, Google Cloud continues to grow at a signficantly faster pace as I analyzed earlier this week in “Google Cloud vs. Amazon and Microsoft: Is ‘New Kid’ Snatching Market Share?“
As if all that doesn’t make life interesting enough for Google Cloud, it is now also competing against itself to prove that it can simultaneously:
- grow rapidly enough to cover its extensive global buildout costs;
- meet ever-rising customer expectations and requirements; and
- complete that “march to profitability” without missing a step.
That’s a tough overall assignment, but such is life in the Cloud Wars, which remains the greatest growth market the world has ever known.