The Six Five team discusses Google-Alphabet’s latest earnings.
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Transcript:
Daniel Newman: Oh Pat, I had the chance to go and talk to Caroline Hyde on Bloomberg about this, so I’m fully inundated on this one.
Pat Moorhead: Of course, you did.
Daniel Newman: Yeah, I know. I forgot what else I was going to talk about. I just needed to drop that.
Anyways, Tuesday was a good day, like I said, because the last several quarters have just felt so depressing. It was the first wave where we had good results and everyone was selling because… We just saw the imminent glut and doom and slow down that was going to happen. And then there was the next several quarters where things actually weren’t good and then the numbers weren’t good. And so when you’re doing what we do and you kind of come around and you cover this every quarter, you’re like, “God, I could really use a little bit of a wave of bullishness.” And of course I said this earlier, we still have lots and lots of challenging moments ahead of us, but it’s good to see what’s happened over the last several quarters is you have seen a fairly significant adjustment down. And so we haven’t really talked about that here because we’re just saying, “Hey, they beat, they beat, they beat, they beat.”
But everybody’s beating right now on much more tempered guidance. Remember during the 21 year, it was like, “We’re going to grow 90%.” And then they grow 200%. It’s like, oh, this is great. But that’s not the world we’re in. Over the last few quarters we’ve seen… We’re guiding a little bit more cautiously. I mean, Google grew 3%, or Alphabet, 3%. So that that’s not a huge top line growth, but remember this is top line growth over what was those remarkable quarters after quarters after quarter of really good top line growth in a period where everybody says the world’s probably going to end. Is that good enough for doom saying? Is that we’re at the world is going to end?
Pat Moorhead: Yes, that’s really good.
Daniel Newman: The company beat on top, they beat on the bottom. They came in most of their categories. That YouTube, they were above. Cloud was right about at consensus. And they cut some costs. So their traffic acquisition costs and also just some of their overall operating costs were down. And again, they’ve made cuts too. They’ve been quietly cutting staff and headcounts and slowing down hiring, which again is very, very well-received among the street. People want to see operational excellence and it means you can’t spend too much too fast.
Pat, this was a big quarter for Cloud and again I’m going to save that one for you to talk more about the details but actually showed a profit. Now again, that was a quick turn. There was some accounting in terms of depreciation that they change some of the way they account for depreciation, which does help. But as I always say, when you look at non-gap, the results or what they call adjusted earnings, there’s always lots of interesting things that are happening in there. So I don’t judge because again, you’d have to judge against every company that has an adjusted number and how they get to those people.
Accounting is a tricky field and there’s a lot of areas and different ways to move things around, but this was huge. You were talking about losing hundreds of millions a quarter. And by the way, they’ve been investing in it. So the overall business though is healthy. And Pat, here’s probably what I want to talk about most other than Cloud, because I do want to leave you something to talk about, is how at risk is Google’s business model with the onset of generative AI?
And that’s probably been one of the biggest things on my mind is that when you have a company that had cornered a market in search and it has definitively controlled market share, meaning high double digits into the 90s percent of market in advertising and for every 1% of the search market, they figured it’s around $2 billion of revenue. All of a sudden, you have something like a ChatGPT embedded into Bing and you have seven and a half million people download Bing in a day or in a week or some very short period of time and you go, “Oh my God, is the search market at risk?” Because that’s really the question mark for people who are long or people who are short Google is, is the search model, is this business model sustainable?
And here’s what I’m going to say is that Microsoft got a distinct early mover advantage by being first by going in with OpenAI and deploying it across this product portfolio. But Pat, just like we talk about with chips all the time, we need a healthy competitive ecosystem long-term to make it better for everybody. So the thing is, I do think Google will probably cede a little bit of search market share to what Microsoft is doing. I think Microsoft’s going to be very aggressive. We talked about last week with the Samsung potentially buying access to it being on the Samsung devices and mobile, but I think the kind of early concerns of Google and its search, its business model, and the early concerns of its falling off a cliff are premature.
I think the early concerns that Google will not have an answer to ChatGPT or OpenAI is early, and I think they will become very competitive. I mean, you got to remember this company’s probably spent more money over the last decade on AI than most of the rest of the tech industry combined. And they had Google DeepMind and they have Brain and they now have decided to join forces, put them together. And I think what’ll start to happen is you’ll see innovation accelerate. I mean, I give a ton of kudos to Microsoft for the move they’ve made. They absolutely knocked Google between the eyeballs, put them off balance and forced them to come early to market with a product they really didn’t want to bring to market yet with Bard. And now, Google’s going to embed generative in its search. That’s what’s been come out this week or last week, recently.
And I think once people see that it can kind of do the same thing, all that migration, that early migration that was having people like, “Oh, Google does this too, I’m fine.” So now, Microsoft’s going to have to find a new sort of thing to sort of create buzz and interest. And I mean, I think their thing is going to be the fact that it’s built into so many other tools. That’s going to be an effective way to get people using search right in your productivity or right in your Office suite. But I just don’t see the share moving that quickly. So overall solid quarter, great news on the Cloud, interesting inflection on the AI side, but this is going to be a fun one to watch.
Pat Moorhead: Yeah, there were four parts to the call. First two were updates on what they talked about the previous one, which was AI and then the focus of the company and the efficiencies. Two businesses they highlighted were Cloud and finalized with YouTube. I’m going to focus on the Cloud part. So as you said, for the first time the company made a profit in Cloud. I saw the haters came out and said, “Oh, at AWS, it was 10 times at that revenue level.” That’s fine, but still Cloud made a profit. What I really appreciated was the amount of time that Google does commit. I really appreciated how much time they spent on Google Cloud, and really some great nuggets that came out. So first of all, over the past three years, Google Cloud’s deal volume has grown 500%, large deals over 250 million growing more than 300%.
So the selling motion, rapid expansion since TK has come in there. And then you have to have people to implement and partners, right? Certified practitioner partners increased 15x. Global SI’s been built 13 dedicated practices on Google Cloud compared to zero. I also appreciated them talking about where generative AI is actually in use at customers today. PaLM generative AI model and Vertex are at Behavox for security, Oxbotica to test autonomous vehicles, and a company called Lightricks to develop text to image features. I think that’s important. I think the company actually did a really good job talking through this. It also talked about it has 30,000 cybersecurity companies, including big companies like Broadcom and Europe’s Telepath. And interestingly, and in contrast to how AWS talked about GPUs, it talked a lot about NVIDIA. And it did a little bit of a flex that said they’re the only provider to announce availability of NVIDIA’s new L4 Tensor Core GPU with its G2 VMs.
I thought that was super interesting. Now it did again lead with TPUs, but it followed up with a very strong statement with NVIDIA. NVIDIA, by the way, must absolutely freaking love being cited in somebody’s press release. So all around, I’m really happy with the progress that Google Cloud is making. I’m less hung up about comparisons to other companies, but if you look at the size, I mean it’s slowly becoming one of the largest enterprise provider of software and services out there on the market. And I consider that a win for the company that’s very consumer heavy. Any final comments, Dan?
Daniel Newman: No. You know what? And sorry about the noise, getting ready just to do another shoot here in the background, Pat, but no, I actually was impressed. And like I said, with multi-cloud heating up, I like Google Cloud’s prospects. And again, it’s more about the end. It’s that Andy Jassy comment about the 90% is on-prem. If you believe that only 10% of workloads will ultimately be in the public cloud, which I think there will be more balance. We’re seeing that. But Pat, there’s so much growth opportunity here. And Google has some really nice competitive offerings and so I think in the multi-cloud era, Google’s going to do really, really well. So it’s promising. It was a good quarter.
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.
