Alphabet’s revenue accelerated for the sixth consecutive quarter. Revenue grew by 15% and clocked the fastest growth since Q1 2022. Google Cloud revenue accelerated for the second consecutive quarter. The company also announced its first dividend and authorized a new $70 billion share repurchase plan. The margin improvement due to the cost reduction initiatives was the icing on the cake. The shares closed 10% higher following strong results and reached the $2 trillion market capitalization milestone.
Revenue
Revenue grew by 15% and 16% in constant currency YoY to $80.54 billion and beat estimates by 2.3%. Revenue accelerated for the sixth consecutive quarter. Analysts expect revenue to grow 12.5% YoY to $83.90 billion in the June quarter. While growth is decelerating, the consensus estimates have moved up 100 basis points compared to the estimates prior to the earnings.
Google Services segment revenue grew by 14% YoY to $70.4 billion. Search and other advertising revenues accelerated to 14% YoY growth to $46.2 billion from 13% in the December quarter and 11% in the September quarter, which was primarily due to strong growth in retail, particularly from APAC-based retailers. The strong trend in the advertising business from APAC-based retailers began in Q2 2023 last year and continued in the recent quarter.
Management also highlighted tougher comps in the upcoming quarter and headwinds from the strong dollar. “As we look ahead, two points that will affect sequential year-on-year revenue growth comparisons across Alphabet. First, Q1 results reflect the benefit of leap year, which contributed slightly more than one point to our revenue growth rate at the consolidated level in the first quarter. Second, at current spot rates, we expect a larger headwind from foreign exchange in Q2 versus Q1.”
Margins
The company’s cost control initiatives, such as workforce reductions and office space optimizations, have helped the company report very strong margins in the recent quarter. Going forward, management expects operating margin for 2024 to be higher than in 2023. This is from moderating expense growth for higher depreciation and expenses related to higher technical infrastructure investments.
- Gross margin expanded 200 basis points YoY and 160 basis points QoQ to 58.1%.
- Operating margin expanded 660 basis points YoY and 410 basis points sequentially to 31.6%. Non-GAAP operating margin, which excludes severance and related office space charges, came in at 32.5% compared to 28.6% in the same period last year.
- The operating margin was the second highest in the previous 10 years, and if we exclude the non-recurring charges in the recent quarter, it is the highest in the last decade.
Ruth Porat, CFO of the company said in the earnings call:
“Turning to margins, our efforts to durably re-engineer our cost base are reflected in a 400 basis point expansion of our Alphabet operating margin year-on-year, excluding the impact of restructuring and severance charges in both periods. You can also see the impact in the quarter-on-quarter decline in headcount in Q1, which reflects both actions we have taken over the past few months and a much slower pace of hiring. As we have discussed previously, we are continuing to invest in top engineering and technical talent, particularly in Cloud, Google DeepMind, and technical infrastructure. Looking ahead, we remain focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure. We believe these efforts will enable us to deliver full-year 2024 Alphabet operating margin expansion relative to 2023.”
–End Quote
Net margin improved 780 basis points YoY and 540 basis points sequentially to 29.4%. GAAP EPS came in at $1.89, up 61.5% YoY and beat estimates by 25%. It partly benefitted from a net gain on equity securities of $2.2 billion, and the $104 million reversal of previously accrued performance fees related to some of these investments, which increased net income by $1.9 billion and EPS by $0.15.
Analysts expect the company to report GAAP EPS of $1.83 in the next quarter, up from expectations of $1.69 prior to the earnings report.
Cash Flows and Balance Sheet
Operating cash flow was $28.85 billion or 35.8% of revenue compared to $23.51 billion or 33.7% in the same period last year. Free cash flow was $16.84 billion or 20.9% of revenue compared to $17.22 billion or 24.7% in the same period last year. Free cash flow was lower than the previous year as capex increased 91% YoY to $12 billion due to AI.
The CFO said in the earnings call, “With respect to CapEx, our reported CapEx in the first quarter was $12 billion, once again driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The significant year-on-year growth in CapEx in recent quarters reflects our confidence in the opportunities offered by AI across our business. Looking ahead, we expect quarterly CapEx throughout the year to be roughly at or above the Q1 level, keeping in mind that the timing of cash payments can cause variability in quarterly reported CapEx.”
This means that capex is expected to rise about 49% YoY to $48 billion in 2024.
Cash and marketable securities were $108.09 billion compared to $110.92 billion in the December quarter. Debt was also largely unchanged at $13.23 billion compared to $13.25 billion in the December quarter.
Another key highlight in the report was the announcement of the first quarterly dividend of $0.20 and the authorization of an additional $70 billion share repurchase plan. The company repurchased shares worth $15.7 billion in the recent quarter.
Key Metrics:
Google Cloud Revenue
Google Cloud revenue grew by 28% YoY to $9.6 billion, helped by increasing contributions from AI and strong Workspace growth, which is productivity apps. The revenue growth accelerated for the second consecutive quarter from 26% in the previous quarter and 22% in the September quarter. The strong growth also further helped to narrow the gap with Microsoft Azure’s growth of 31%. Google Cloud now only trails Microsoft Azure by 3 percentage points compared to 4 points and 7 points in the previous two quarters.
The operating margin for Google Cloud came in at 9% compared to 3% in the same period last year and 9% in the December quarter.
Google Advertising Revenue
Google Advertising revenue accelerated for the fifth consecutive quarter. Revenue grew by 13% YoY to $61.7 billion, compared to 11% growth in the December quarter, and was flat in the same period last year.
- Google Search and other advertising revenues grew by 14% YoY to $46.2 billion. It was up from 13% growth in the previous quarter and 2% in the same period last year.
- YouTube ads revenue grew by 21% YoY to $8.09 billion, helped primarily by direct response marketing and brand advertising. It was up from 16% growth in the previous quarter and a decline of (-3%) in the same period last year.
- Networking advertising revenue declined by (-1%) YoY to $7.41 billion. It was better than the (-2%) decline in the previous quarter and (-8%) decline in the same period last year.
Earnings Call:
Capex
Big Tech capex has surged over the past few quarters and Google is no exception.
Capex grew 91% YoY to $12 billion; this is up from 45% growth and $11 billion last quarter. As stated, this means that capex is expected to rise about 49% YoY to $48 billion in 2024.
The CFO stated less than 10% was going to office with the rest going toward infrastructure (or AI basically).
Per the earnings call:
Ruth Porat:
“And then in terms of CapEx, as I said in opening comments, we do expect the quarterly CapEx throughout the year to be roughly at or above the $12 billion cash CapEx we had here in Q1. As I said, you can always have variability in the reported quarterly CapEx just due to the timing of cash payments, but roughly at or above this level. And it really goes to Sundar's comment, opening comment, that we're very committed to making the investments required to keep us at the leading edge in technical infrastructure to support the growth in Cloud, all the innovation and search that he and Philip have spoken about and our lead with Gemini. I will note that most nearly all, I should say, of the CapEx was in our technical infrastructure. We expect that our investment in office facilities will be about less than 10% of the total CapEx in 2024, roughly flat with our CapEx in 2023, but is still there […]
Clear Path to Monetization
In the call, the CEO highlighted six points as to why the company is positioned to tap the AI opportunity.
- Leadership position in R&D
- Infrastructure leadership including Google Cloud
- The company invests in developing new AI models; custom TPUs power AI projects which are in the 5th generation and this powers Search
- Global product footprint
- Velocity in execution (my note: this one can lag at times)
- Monetization paths
Of these, the last one on monetization paths interests us the most.
Regarding #4, the global product footprint combined with infrastructure leadership (#2) will help with data sovereignty in the medium-term as AI will become required to have data residency in the country the data is produced. This isn’t unique necessarily as all hyperscalers offer this, but it’s notable and supports our thesis that Big Tech will get Bigger.
The clear path to monetization that Google speaks about is through Google Cloud, which accelerated this quarter and is closing the gap with juggernaut Azure. Secondly, it’s through Search revenue and ad revenue on YouTube and its advertising network. As stated above, Google Cloud accelerated to 28% growth, up from 26% growth in the previous quarter. Search also accelerated to 14% growth this quarter for revenue of $46.2 billion, compared to growth of 13% and revenue of $48 billion last quarter (seasonal high due to being Q4). These are record quarters for Search revenue.
Per the opening remarks – note, SGE refers to Google Search Generative Experience (SGE) which uses gen AI to provide brief overviews of web pages.
“We have clear paths to AI monetization through ads and cloud, as well as subscriptions. Philip will talk more about new AI features that are helping advertisers, including bringing Gemini models into Performance Max. Our Cloud business continues to grow as we bring the best of Google AI to enterprise customers and organizations around the world. And Google One now has crossed 100 million paid subscribers. And in Q1, we introduced a new AI premium plan with Gemini Advanced […]
“You can see that from the increases in our capital expenditures. This will fuel growth in cloud, help us push the frontiers of AI models, and enable innovation across our services, especially in Search. AI innovations and Search are the third and perhaps the most important point I want to make. We have been through technology shifts before, to the web, to mobile, and even to voice technology. Each shift expanded what people can do with Search and led to new growth. We are seeing a similar shift happening now with generative AI. For nearly a year, we have been experimenting with SGE and Search labs across a wide range of queries. And now we are starting to bring AI overviews to the main Search results page. We are being measured in how we do this, focusing on areas where gen AI can improve the Search experience, while also prioritizing traffic to websites and merchants.
We have already served billions of queries with our generative AI features. It's enabling people to access new information, to ask questions in new ways, and to ask more complex questions. Most notably, based on our testing, we are encouraged that we are seeing an increase in Search usage among people who use the new AI overviews as well as increased user satisfaction with the results.”
–End Quote
Later, the CFO added: “We're continuing to experiment with new ad formats, including search and shopping ads alongside search results in SGE. And we shared in March how folks are finding ads either above or below the SGE results helpful. We're excited to have a solid baseline to keep innovating on and confident in the role SGE, including ads, will play in delighting users and expanding opportunities to meet user needs.”
Toward the end of the call, an analyst asked the CEO to quantify the monetization. He did not provide specifics, rather stated: “There are questions about monetization, and based on our testing so far, I am comfortable and confident that we'll be able to manage the monetization transition here well as well.”
My note: there is a lot of corporate-speak on these calls to wade through. However, to keep it brief and direct, areas where Google can continue to monetize Search is on mobile with rumours that Apple may partner with Google’s Gemini to power AI apps on iPhones in the future. Android also currently has 3 billion users that Gemini can reach.
60% of Funded Gen AI Startups use Google Cloud
Google Cloud has the majority of funded AI startups building on Google Cloud. Although this is too small to make a revenue impact, the message is that Google Cloud is at the cutting edge for AI workloads training on Nvidia’s GPUs and its own TPUs. Google also recently announced Axion CPUs.
“Today, more than 60% of funded Gen AI startups and nearly 90% of Gen AI unicorns are Google Cloud customers […] We also announced Axion, our new Google design and ARM-based CPU. In benchmark testing, it has performed up to 50% better than compatible x86-based systems. On top of our infrastructure, we offer more than 130 models, including our own models, open source models, and third-party models. We made Gemini 1.5 Pro available to customers, as well as Imagine 2.0 at Cloud Next.”
It was also stated that over 1 million developers use Google’s generative AI tools.
Google Third-Party Cookie Deprecation
Google has delayed the third-party cookie deprecation on its browser for the third time with plans to now phase them out in 2025. As of now, it has restricted third-party cookies to only 1% of Chrome users. The delay is due to concerns from the regulatory authorities, particularly the UK’s Competition and Markets Authority (CMA) and the ad industry. The recent release said, “It's also critical that the CMA has sufficient time to review all evidence including results from industry tests, which the CMA has asked market participants to provide by the end of June.”
Regulators like the UK’s Competition and Markets Authority (CMA) have previously raised concerns that Google’s plan to replace third-party cookies with its Privacy Sandbox initiative will give Google an unfair advantage in the ad market. According to eMarketer and 33Across, cookies were used in 78% or more of programmatic ad buys. Google’s Privacy Sandbox replaces cookies with 20 different APIs for “Measurement and Relevance” and also “Other APIs” to help advertisers target users based on topics and cohorts without tracking individual behavior. For users and advertisers, this is an improvement from cookies. For competitors like The Trade Desk, this poses a threat as Google own major properties across the web, and theoretically, eliminating cookies can limit the effectiveness of a platform like The Trade Desk. This is because cookies leak a lot of data to third parties like The Trade Desk, whereas what Google seeks to do is stop those leaks to outside parties on their own properties (Chrome for now, Android soon after).
Despite Google being the target for alleged monopolistic control over Search and its ad network, Apple and Mozilla have already phased out identifiers on their browsers, and Apple has also done this on iOS. We covered this extensively, including here. According to Google, Privacy Sandbox will use the same Android API solutions, and no one (including Google) will have a privileged position (given the recent allegations in the DOJ lawsuit, I’d take that with a grain of salt).
Ad-tech companies like The Trade Desk have been critical of Google’s Privacy Sandbox. We previously discussed this here. The Trade Desk is a solid resource on discussing the downside to deprecating cookies, as they are one of Google’s fiercest opponents in that regard. The Trade Desk has famously created an alternative for a consortium of first parties and third parties called Unified Ad ID or UID2.0. There is a long and impressive list of collaborators that have adopted UID2.0.
So, who better to turn to than Jeff Green for the most recent, unfiltered commentary from one of Google’s opponents. Here is what was stated on the most recent earnings call:
Brian Fitzgerald (Analyst)
Thanks. Jeff, it looks like third-party cookies won't be going away now for at least until '25. What are your thoughts on the cookie deprecation delay once again and how, if at all, it impacts the industry? And then, maybe secondarily, could you — could the continued delays have any impacts, positive or negative on UID2.0 adoption?
Jeff Green (CEO, The Trade Desk)
[…] I think it is a strategic mistake for Google to deprecate cookies. I don't think the risk/reward is worth it for them. And I would not be surprised to see them delay this again and again as they continue to buy more time. I think that's exactly what we saw because we weren't surprised by this, we predicted this. We have just been sort of quick to move on. I do want to give Google a little bit of credit though. I mean, Apple took away cookies and said nothing, gave no announcement, offered no alternatives. Google said we're going to take away cookies, they gave some head start. Now, they moved the date a bunch, both forward and backward, which to me didn't make any sense. But they did at least try to propose something else, which was a privacy sandbox. The unfortunate thing was what they proposed was half-fake and not a valid solution. And so, the industry has just been criticizing it, us included, for the better part of the year because those criticisms, I think, were pretty unanimous even from industry bodies like the IAB that I never expected to take such a strong position on privacy sandbox. I think it forced Google's hand to delay cookie deprecation. So we were not surprised by it. The net effect of that is that it gives the open Internet a bit more runway to adopt things like UID2 and come up with authentication and identity strategies so that they can thrive in an environment outside of cookies. […]
And so, I think the average publisher is saying exactly what we were saying four or five years ago that while we think it's a strategic mistake for Google to get rid of cookies, we also think it's a strategic mistake for all the rest of us to do nothing.”
–End Quote
Google’s Antitrust Lawsuit to be Decided in Q3
We’ve covered the antitrust lawsuit in the past here when we stated: “Therein lies the issue. Google undisputedly has the world’s best consumer data, but did this grow to become part and parcel with operating a monopoly? The Department of Justice has asserted anti-trust violations against Google with the trial beginning in September 2023 […] This is not a headline to simply dismiss. It’s the first time the DOJ has brought a case of this kind against a technology company since Microsoft. If there are even minor cracks in Google’s monopoly, there could stand to be a stock or two that starts a new trajectory.”
Of course, the stock that starts the new trajectory could be Google if the DOJ rules in their favour. The trial is now concluded, and in his closing arguments, U.S. District Judge Amit Mehta questioned whether another company could rival Google’s search due to the cash and data that the company possesses, especially with Google’s 90% market share as a search engine in the crosshairs. The company pays $20 billion to make its search engine the default across Apple and Mozilla browsers and devices. Google argues they are widely used because of large R&D investments, which has made their technology superior. In cases where other search engines were the default, users complained or manually switched on their own.
The decision is expected to be announced in late summer or early fall.
Conclusion
Alphabet delivered a perfect earnings report. It beat the top line and bottom line; plus important key metrics are accelerating. Google Cloud revenue accelerated for the second consecutive quarter, narrowing the gap with Microsoft Azure. The dividend announcement was welcomed to help Google meet pressures from the Street.
Meanwhile, Alphabet has a tough year ahead with pushback from the deprecation of cookies in the early part of 2025 (assuming there are no further delays), and the looming decision from the DOJ on the antitrust trial. We continue to believe this is a landmark case for a tech company, and requires a bit of a gamble on how it will turn out for Google.
We’ve covered Alphabet extensively on AI, as well. You can find previous analysis here: