Google's earnings takeaways: AI is vendor's 'North Star', layoffs, and Google Cloud profit

CRN breaks down the six biggest takeaways from Google’s first quarter 2023 financial earnings report

or the first time ever, Google Cloud turned a profit thanks to a 28 percent spike in sales which represented the fastest growing segment of its parent company Google.

During Google's first quarter financial earnings report yesterday, CEO Sundar Pichai said he is bullish about investing in Google Cloud around artificial intelligence as well as driving enterprise customer momentum and continued profitability.

"Google Cloud delivered profitability this quarter and we remain focused on long-term value creation here," said Pichai. "We continue to be on a long and exciting journey to build that business."

Additionally, Google executives spoke about the $280bn company's plan around hiring for the remainder of 2023, as well as the $2.6bn charges mostly related to employee severance payments after Google laid off 12,000 employees.

Google's Q1 Earnings Results

Before jumping into the biggest takeaways from Google's (GOOGL) first quarter 2023 earnings results, looking at the company's overall results, Google generated total revenue of $69.8bn. This represents an increase of three per cent compared to the $68bn in sales Google captured in first quarter 2022.

Operating income for Google was $17.4bn for the quarter, down from $20.1bn year over year. Google reported a net income of $15bn, a decrease from $16.4bn in first quarter 2022.

AI was top of mind for Pichai and the other Google executives on the earnings call with media and analysts.

"Our open approach to AI development, coupled with our industry-leading TPUs and best-in-class GPUs from NVIDIA, enable innovative companies to tackle any AI workload with speed and flexibility," said Pichai.

CRN breaks down the six biggest takeaways from Google's first quarter 2023 earnings call around Google Cloud, AI and employee layoffs and hiring.

1. Google Cloud turns a $191m profit

After years of generating an operating loss, for the first time in its history, Google Cloud turned a profit during the first quarter of 2023.

Google Cloud generated operating income of $191m for the quarter. Comparatively, during the first quarter of 2022, the company reported an operating loss of $931m.

Google Cloud generated total revenue of $7.45bn, an increase of 28 per cent from $5.82bn revenue in first quarter 2022.

"Over the past three years, GCP's annual deal volume has grown nearly 500 per cent, with large deals over $250m growing more than 300 per cent," said Pichai. "Nearly 60 per cent of the world's 1,000 largest companies are Google Cloud customers."

Looking at the history of Google Cloud's operating loss: in fourth quarter 2022, the company generated an operating loss of $480m. In third quarter 2022, Google Cloud reported an operating loss of $699m. For its second quarter 2022, Google Cloud generated an operating loss of $858m.

The Takeaway: For its entire fiscal year 2022, Google Cloud reported an operating loss of nearly $3b. The turn from operating at a loss to generating profitability is a huge win for Google Cloud, highlighted by a 28 per cent increase in sales.

Google's earnings takeaways: AI is vendor's 'North Star', layoffs, and Google Cloud profit

CRN breaks down the six biggest takeaways from Google’s first quarter 2023 financial earnings report

2. Economy slowing cloud consumption: long-term GCP profitability is the ‘focus'

Although Google Cloud sales and profitability are heading in the right direction, Google Chief Financial Officer Ruth Porat said economic "uncertainty" is leading to a slowdown in GCP consumption.

"In the first quarter, we continued to see slower growth of consumption as customers optimised GCP costs reflecting the macro[economic] backdrop, which remains uncertain," said Porat during the company's earnings report.

Google's CFO said Google Cloud saw "some headwinds from slower growth of consumption, with customers really looking to optimise their costs given that macro climate."

However, Google's CEO and CFO said they were pleased with the momentum of Google Cloud and the constant innovation being launched by its cloud arm.

"In terms of operating performance, we remain focused on driving long-term profitable growth in cloud, while continuing to invest given the substantial opportunity," said Porat.

The Takeaway: Although customers might be consuming less GCP right now, sales growth and innovation remains high right now for both the near- and long-term for Google Cloud.

Google's earnings takeaways: AI is vendor's 'North Star', layoffs, and Google Cloud profit

CRN breaks down the six biggest takeaways from Google’s first quarter 2023 financial earnings report

Google's headcount surged despite recent layoffs

As of March 31, 2023, Google's total headcount is 190,711.

In March 2022, the company's headcount was 163,906—about 26,800 less than in March 2023.

In January, Google parent company Alphabet announced it would be laying off 12,000 employees.

Google's current headcount of 190,711 employees includes "almost all of the employees affected by the reduction" of 12,000 employees. Google expects most of those employees affected will no longer be reflected in its headcount by the end of the second quarter of 2023.

Google's CFO said her company is "meaningfully slowing the pace of hiring in 2023, while still investing in priority areas, particularly for top engineering and technical talent."

The Takeaway: Google's headcount is significantly larger in 2023 compared to 2022 even after axing 12,000 employees this year. These numbers, as well as Google's pledge to continue hiring top technical talent, bodes very well for Google Cloud.

Google's earnings takeaways: AI is vendor's 'North Star', layoffs, and Google Cloud profit

CRN breaks down the six biggest takeaways from Google’s first quarter 2023 financial earnings report

Google's North Star: AI

As the battle for cloud AI supremacy continues between Google, Microsoft and Amazon Web Services, Sundar Pichai is confident in his company's strategy. Google's CEO highlighted several new innovations including its conversational AI service Bard, and PaLM API for developers.

"Our open approach to AI development, coupled with our industry-leading TPUs and best-in-class GPUs from NVIDIA, enable innovative companies to tackle any AI workload with speed and flexibility," said Pichai. "We are the only cloud provider to announce availability of NVIDIA's new L4 Tensor Core GPU with the launch of our G2 VMs, which are purpose-built for large inference AI workloads, such as generative AI."

In March, Google introduced its Bard AI service and has since added its PaLM model to make it even more powerful. "Bard can now help people with programming and software development tasks, including code generation, lots more to come," said Google's CEO.

For developers, Google recently released its PaLM API alongside a new MakerSuite tool, which provides a simple way to access Google's large language models and begin building new generative AI applications quickly.

"Our growth is also driven by our product leadership. We are bringing our generative AI advances to our cloud customers across our cloud portfolio," said Pichai. "Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation."

The Takeaway: Customers and partners should expect Google Cloud to launch new AI innovations at a rapid pace for the rest of the year as Google looks to win AI customer mindshare against Microsoft and AWS.

Google's earnings takeaways: AI is vendor's 'North Star', layoffs, and Google Cloud profit

CRN breaks down the six biggest takeaways from Google’s first quarter 2023 financial earnings report

Google Leveraging Mandiant AI, Combining AI Groups

Google has introduced generative AI to identify and prioritise cyber threats, automate security workflows and response, and help scale cybersecurity teams for its large customer base, Pichai said. This security innovation is, in part, thanks to Google's blockbuster $5.4bn acquisition of cybersecurity superstar Mandiant last year.

"We are successfully integrating Mandiant with our products, including Mandiant Threat Intelligence and Breach Analytics," said Google's CEO.

To accelerate AI innovation and progress, Google is combining its Google Research team, dubbed the Brain Team, with its cutting-edge AI subsidiary DeepMind into a single unit.

"Combining all this talent into one focused team, backed by the pooled computational resources of Google, will help accelerate our progress and develop the most capable AI systems safely and responsibly," said Pichai.

"So both are getting access to pool talent so that they can work together in a coordinated way which will definitely will help us pool our computational resources, which is going to be critical and will help us build," he said."The core product is obviously building more capable models safely and responsibly and taking into account all the capabilities our customers need, both on the consumer side and the cloud side and being able to iterate and getting that virtuous cycle going."

The Takeaway: Google is combining its AI experts under one roof to try to accelerate AI innovation even faster.

Google's earnings takeaways: AI is vendor's 'North Star', layoffs, and Google Cloud profit

CRN breaks down the six biggest takeaways from Google’s first quarter 2023 financial earnings report

Google layoffs, office space costs: $2.56bn

As a result of its 12,000 layoffs this year, employee severance and related charges totaled $2bn during the quarter.

This represented the majority of expected costs associated with Google's workforce reduction, according to Google.

Breaking down the employee severance and related charges: costs of approximately $835m were on research and development; $445m on sales and marketing; and $253m on general and administrative (G&A) costs.

Additionally, Google "optimized" its global office space during the quarter by closing some offices. As a result of office space reductions, Google witnessed charges of $564m during the quarter.

"We are taking concrete steps to manage our real estate portfolio to ensure it meets our current and future needs," said Google's CFO.

The Takeaway: Google wrapped up the layoffs of 12,000 employees and the reduction of its real estate space for a grand total of $2.56bn. This should help boost Google's operating income—which was $17.4bn in first quarter 2023 compared to over $20bn year over year—for the near future.