The News: Google parent company Alphabet (NASDAQ: GOOG, GOOGL) announced its Q1 2023 earnings ending March 31, 2023. The company’s consolidated revenues for Q1 2023 were $69.8 billion, up 3% year over year (YoY), or up 6% in constant currency. Read the full Alphabet Press Release here.
Alphabet Announces Q1 FY23 Results: Search and Cloud Lift Performance as Google Preps for AI Battles
Analyst Take: Sundar Pichai, CEO of Alphabet and Google, declared satisfaction with the company’s business performance in Q1 fiscal year (FY) 2023, due to Search performing well and momentum in Cloud, as well as the introduction of product updates anchored in deep computer science and AI. As such, the company’s self-proclaimed North Star is providing the most helpful answers for users paved by massive opportunities on the horizon and powering ecosystem-wide innovation.
Key Alphabet Q1 FY23 numbers include:
Revenue: $69.8 billion vs. $68.9 billion expected per Refinitiv
Earnings: $1.17 per share vs $1.07 per share expected per Refinitiv
YouTube advertising revenue: $6.69 billion vs. $6.6 billion per StreetAccount
Google Cloud revenue: $7.45 billion vs. $7.49 billion per StreetAccount
Traffic Acquisition costs (TAC): $11.72 billion vs. $11.78 billion per StreetAccount
Alphabet Q1 FY23: Key Takeaways
The good news is that Google’s Q1 FY23 delivered beats across both the top and bottom lines which upends a streak of four consecutive quarters in which the company missed consensus estimates. Google Q1 FY23 results reflected $2.6 billion in charges related to reductions in the company’s workforce and office space and a $988 million reduction in deprecation expense from the change in estimated useful life for its servers and certain network equipment. Also, a shift in the timing of its annual employee stock-based compensation awards resulting in relatively less stock-based compensation expense recognized in Q1 compared to the remaining quarters of the year. The shift in timing itself will not affect the amount of stock-based compensation over the full FY 2023.
From our perspective, Google’s Search performance was respectable as macroeconomic uncertainties such as the overall slowdown in economic growth, lingering inflation concerns, and geopolitical disruptions impacting supply chains and energy supplies, as well as mounting competition have contributed to more conservative online advertising. Plus, Google reported its Cloud business as profitable for the first time representing a hard-earned milestone under challenging conditions.
Google Cloud also showed a robust 28% growth in the quarter which closely mirrored Microsoft Azure’s 27% growth rate. This is reflective of the overall slowing in the growth of hyperscale clouds but is also reflective of continuing investment in cloud migration even amidst a more cautious macro. With the backdrop of AI investments, we have long felt that this could be a key moment for Google Cloud to catch a tail wind of growth as its long held a unique position among cloud providers for its Data & AI offerings. Another noteworthy item was the margin expansion of its cloud business, which could be viewed as pivotal in its path to growth, which has proven to be a long road with the company continuing to invest in expanding its footprint.
Google Now Playing Advanced AI Chess with Ongoing AI Portfolio Moves and Investments
From our view, Google wields the best data training set, and in combination with significant investments in AI R&D, the company can assert and expand its presence throughout the market. The company’s AI portfolio developments are expected to impact its cloud and overall business, indicating that Google may have a larger role to play in the AI space than is currently acknowledged.
We see that Google’s published data on its AI supercomputer, touting the platform to be more powerful and efficient than competing NVIDIA systems, as a shot across the bow of the entire AI ecosystem. Notably, NVIDIA currently holds 90% share in the AI hardware market and is presently pacesetting the generative AI boom. However, Google’s move suggests increasing competition in the AI hardware market segment, with major players such as AWS, Intel, Qualcomm, and AMD also building their own AI hardware solutions.
We find that Google’s move to challenge NVIDIA has two major implications: differentiation and cost reduction. As the generative AI revolution becomes more expensive, organizations need to find methods to lower cats and shine across the competitive landscape. This may lead to Google integrating its AI hardware into its cloud and enterprise offerings to further differentiate its overall portfolio proposition from competing cloud service providers.
Moreover, Google has made a $300 million investment in AI specialist Anthropic to directly counter Microsoft’s ongoing development work with OpenAI. Of concern is Microsoft’s OpenAI moves and aggressive implementations of ChatGPT fomenting a more formidable competitive threat to Google’s longstanding AI and search engine investments and ecosystem outreach. Plus, we are encouraged that Google is bringing together part of Google Research (the Brain Team) and DeepMind to form Google DeepMind with the mission of accelerating AI initiatives and expanding its influence across the AI ecosystem.
Overall, we see Google making the strategic moves necessary to meet macroeconomic uncertainties during 2023. Moreover, Google’s strategic AI moves indicate that it is fully prepared to counter the looming Microsoft-backed ChatGPT threat as well as other AI competitive threats and make AI integral to invigorating revenue streams across its portfolio including Search and Cloud.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other insights from The Futurum Group:
The Battle for AI Domination Continues after Latest Google Announcement
Google Invests $300mn in Artificial Intelligence Start-Up Anthropic, Taking on ChatGPT
Alphabet Q4 & FY 2022 Revenue Up YoY Although Macro Issues Persist
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
