Google Is All About Cost Control Now

Revenue growth remains sluggish while cost shuffling shines the cloud business’s bottom line

By guest author Dan Gallagher from the Wall Street Journal

April 25, 2023


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Google is working hard to do more with less. How it does with a lot less remains to be seen.

Its parent company, Alphabet Inc., GOOG -2.03%decrease; red down pointing triangle posted decent first-quarter results late Tuesday—decent in the sense that overall revenue narrowly beat Wall Street’s dim expectations thanks to some surprising resilience in the core search advertising business and despite a continuing slump in YouTube ads. But the company’s total advertising revenue was still flat year over year. And while Google doesn’t give formal projections, it said on its conference call to discuss its quarterly results that “the outlook remains uncertain.”

That leaves costs as one of the few things Google can control. The signs here are better: Total operating profit of USD 17.4 billion came in 6 % ahead of Wall Street’s forecasts while free cash flow of USD 17.2 billion came in well ahead of the USD 13.5 billion expected by analysts due lower capital expenditures.

Traffic acquisition costs associated with the search business totaled just 16.8 % of revenue—the lowest for that metric in more than a decade. The company also announced a new USD 70 billion stock buyback—equal to its last repurchase plan announced a year ago.

But cost controls will remain a delicate dance for the company. A race with Microsoft to deploy expensive generative artificial intelligence technology into services like search, cloud and software offerings won’t come cheap. Alphabet Chief Financial Officer Ruth Porat said Tuesday that capital expenditures will be “modestly higher” than last year’s record levels due to the need to invest in technical infrastructure.

Google also reshuffled some costs from its cloud business to the core operations, which it said was done to “provide our business leaders with increased transparency for decision-making.” Partly as a result, Google Cloud showed its first-ever operating profit of USD 191 million for the first quarter. But the shift also weighed on the margins of the core Google Services business that accounts for 89 % of Alphabet’s revenue. And Google Cloud still has a long way to go: Amazon’s AWS cloud unit was generating operating profits of more than USD 2 billion a quarter when at a similar revenue level.

Alphabet’s share price was up only 1% following its call compared with a 9% gain for Microsoft, which also reported results on Tuesday and issued a stronger outlook. Further improvements to Google’s bottom line are likely, though. The company’s total head count of nearly 191000 workers doesn’t yet reflect the laying off of 12000 workers announced earlier this year. Google indicated most of that would be done in the current quarter. Wall Street expects the company’s operating income growth to pick back up this year and resume a double-digit pace by next year.

Those fewer bodies at Google have a lot of work to do.

Google parent Alphabet expects capital expenditures to be modestly higher than last year.  Photo: Patrick T. Fallon/Agence France-Presse/Getty Images