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For Google, Cloud Diversification Pays Off

Posted on Thursday, Apr 30th 2020

According to the Interactive Advertising Bureau, 70% of media buyers are planning to change their advertising spending plans due to the coronavirus. Advertising giants like Google (Nasdaq: GOOG) began witnessing these changing patterns in March. Google recently announced its first quarter results and while revenues outpaced market expectations, the company acknowledged the uncertainty for the second quarter. Google’s advertising revenues may be hurting, but its Cloud segment will help drive growth.

Alphabet’s Financials

Alphabet’s first quarter net revenues grew 13% to $41.16 billion, ahead of the market’s forecast of $40.33 billion. Net income grew from $6.66 billion a year ago to $6.84 billion. Adjusted earnings of $9.87 per share were lower than the market’s forecast of $10.38 per share.

By segment, Google Properties revenue rose 11.6% to $28.54 billion, below estimates of $29.07 billion. Google Properties revenues includes ad and services revenue from internet search, Gmail, Google Play, and YouTube. YouTube revenue rose 33% to $4.038 billion. Google’s net revenue, excluding traffic acquisition costs (TAC), of $33.7 billion was better than the market’s forecast of $33.2 billion. TAC rose 9% to $7.45 billion compared with the estimates of $7.75 billion. Revenues from Other Bets fell from $170 million a year ago to $135 million for the quarter.

According to the management, Google’s display ad revenues dropped by more than 10% in March as marketing budgets globally were cut in reaction to the lockdowns. The Covid-19 slowdown has hurt advertising revenue from travel, auto, and retail sectors. But besides large players cutting down their marketing costs, Google will also be hurt by the recessionary conditions that will hurt small businesses. Google believes that the current quarter will be a difficult one for it, and in reaction, the company is expected to be looking at cost optimization opportunities by reducing hiring and cutting its own marketing budgets.

Google does not provide an outlook for the quarter or the year, but analysts expect the results to be weak given that advertising is still Google’s core revenue source.

Alphabet’s Cloud Growth

While advertising offered a bleak view for Google, things for the cloud segment are looking up. Cloud computing revenues grew 34% over the quarter to $2.78 billion as the world migrated to work at home models. Last year, Google had made leadership changes to its Cloud initiative when it hired Cloud CEO Thomas Kurian from Oracle. Google continued to make significant advancements in the segment under his leadership. Earlier this month, Google announced plans to improve its partnership with Cisco to offer better integration with Cisco’s software-defined wide area network (SD-WAN) tools with Google Cloud.

Known as the Cisco SD-WAN Hub with Google Cloud, the two companies will work together to provide a manageable private connection for applications from an enterprise’s data center to the cloud. Organizations use SD-WAN tools to manage connections between branches of an office or other intra-company networks. Using the new tool, they will be able to extend this reach to Google’s GCP cloud platform. Organizations will thus be able to maintain service-level agreements, compliance policies and security settings for applications that reach into the cloud. Additionally, the Cisco-powered connection will give them the flexibility to put portions of an application in one location, while running another portion on a private cloud, all while being managed through Google’s Anthos.

Google also announced the production release of Anthos for Amazon’s AWS and a preview release of Anthos for Microsoft’s Azure cloud. Anthos was released last year and is an application management platform that provides the ability to oversee managed Kubernetes clusters in corporate data centers or in public cloud services. Besides covering infrastructure management, Anthos also manages clusters and services, policy enforcement, application deployment, and application development. Anthos not only allows organizations to be cloud agnostic but also promotes cloud diversity, enabling organizations to choose multiple cloud vendors to manage risk.

Google offers developers with access to a suite of tools and libraries to build high-quality apps faster. Developers can build apps for services like Android, the Web, Cloud and Maps using easy to use tools such as Firebase and Tensor Flow. Google’s App Engine allows developers to build scalable applications on a fully managed serverless platform. It lets developers build and deploy apps using languages such as Java, PHP, Node.js, Python, and C#.  According to Gartner, the global PaaS market is estimated to grow to $31.8 billion by 2022 from $19 billion last year. Google is trying to cash in on this growth by allowing organizations to build apps and integrating these apps with other tools along with those that are available on lease from GCP. We don’t have enough metrics on Google’s PaaS strategy as the company is not reporting them. It should.

Given that the current crisis will continue for a few more months, Google’s diversification into businesses like the Cloud will help it grow. The market was pleased with Google’s results and the stock climbed 7% in the after-hours session. Its stock is trading at $1,233.67 with a market capitalization of $846.4 billion. It had climbed to a record high of $1,532.11 in February this year. The stock had fallen to a 52-week low of $1013.54 in May last year.

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