Google Cloud growth slows as Alphabet net income plunges

Even though Google Cloud revenue growth showed signs of slowing, it nevertheless provided something of a bright spot as parent company Alphabet — hit hard by the tightening of customer budgets — posted a year-over-year decline in net income for its 2022 fourth quarter.

Fourth-quarter gross revenue for Alphabet was $76.05 billion, up just 1% from $75.3 billion a year ago, according to company results posted Thursday. Net income (profit) was $13.6 billion, down 34% from $20.6 billion in the fourth quarter of 2021.

The company’s share price dropped by 3.29% Friday on the news, closing at $105.22.

Though revenue grew slightly, rising expenses — mainly for research and development — were a major factor in the steep drop in net income.

One of the best-performing business segments for the quarter was Google Cloud, where revenue was up by 32% year on year, growing to $7.32 billion.

Google Cloud cuts losses

Google Cloud was one business unit that managed to keep costs down, which helped cut losses. The business unit operated at a $480 million loss in the most recent quarter, compared to the $890 million it lost in the year-earlier period. Though cloud computing provides revenue opportunities for Google and competitors including Microsoft and AWS, costs related to expanding and running infrastructure are high.

It wasn’t all good news for the cloud business, however. Even though cloud revenue was up, growth was slower than the 38% jump in revenue the company reported for the third quarter of 2022.

Meanwhile, Google’s total advertising sales fell to $59 billion, down 3.6% from the $61.2 billion the company posted a year earlier. In particular, a slowdown in advertising on YouTube caused revenue to fall for that unit to $7.96 billion, an 8% decrease from the $8.63 billion it generated in the prior-year period.

Going forward, Google is focused on growing its advertising revenue through AI-driven innovation, Chief Business Officer Philipp Schindler said on a call with analysts after the results were posted.

“Already, breakthroughs in everything from natural language understanding to generative AI are fueling our ability to deliver results that drive meaningful performance for advertisers and are useful to users,” he said.

Google plans to roll AI into more products

CEO Sundar Pichai told analysts on the call that in the coming months, Google will start rolling out AI built on its large language models into its products, starting with LaMDA (Language Model for Dialogue Applications). He said that both LaMDA and PaLM (Pathways Language Model) would be made available so that “people can engage directly with them,” which will help the company “continue to get feedback, test and safely improve them.”

LaMDA currently works with 137 billion parameters, while PaLM uses 540 billion. In comparison, GPT-3.5 — the large language model developed by Microsoft-backed OpenAI and the basis for ChatGPT — uses 175 billion parameters.

In addition to growth for Google Cloud, Google’s Other Revenues segment — which includes hardware and nonadvertising YouTube revenue — also posted a revenue increase, totaling $8.8 billion, up 8% from the year prior. Additionally, revenue in Alphabet’s Other Bets, a business segment that comprises projects such as health technology and driverless cars, rose to $226 million, up from $181 million in the fourth quarter of 2021.

On the analyst call, CFO Ruth Porat announced that starting in the first quarter of 2023, the AI subsidiary DeepMind would be reported as part of Alphabet’s corporate costs, instead of Other Bets, where it currently sits. Porat said this was to “reflect the increasing DeepMind collaboration with Google Services, Google Cloud and Other Bets.”

Alphabet’s results come mere weeks after the company announced it would be laying off around 12,000 employees. As a result of those job cuts, the company expects to incur employee severance and related charges of $1.9 billion to $2.3 billion, the majority of which will be recognized in the first quarter of 2023.

Additionally, Alphabet expects to incur a further $500 million of costs related to exiting leases early.

Despite the dramatic reduction in workforce size, Porat said the company will “continue hiring in priority areas with a particular focus on top engineering and technical talent as well as on the global footprint of our talent.”