Alphabet Inc.’s earnings Thursday after the bell contained something of a surprising detail: Its Google cloud unit is banking $1 billion a quarter in sales.
Though that’s a small portion of the company’s overall $32.32 billion in revenue, it’s a fast-growing chunk. And it’s the first time in years executives have broken out cloud specifically. Usually, cloud is grouped into “Google Other” with the company’s hardware and Play Store sales, which logged sales of $4.69 billion in the fourth quarter — including the cloud unit — an increase from $3.4 billion in the year-earlier period.
During the company’s third-quarter conference call, Chief Financial Officer Ruth Porat said she listed the Google Other business segments in order from greatest to least contributor. On Thursday’s call, Porat said hardware moved to the front of the list, followed by cloud and Play.
Alphabet class A stock GOOGL, -0.05% GOOG, -0.19% fell 2.7% to $1,181.59 after hours, following the company’s earnings release. The class A stock has gained 45% in the past 12 months, with the S&P 500 index SPX, -0.06% rising 24%.
Despite the company’s growth in cloud, and it being one of the company’s top three largest bets — YouTube and hardware being the two others — rival Amazon.com Inc. AMZN, -4.20% -owned Amazon Web Services dwarfs Google’s cloud revenue, as it logged $5.1 billion in the fourth quarter. Microsoft Corp. MSFT, -0.79% does not break out its cloud division, but rather includes it within its intelligent cloud business unit, which recorded revenue of $7.2 billion in its fiscal second quarter.
Unlike rival cloud providers, Google has publicly said since at least 2016 that it is running the entire company with a focus on artificial intelligence, a fact that it tells its cloud customers is a competitive advantage.
“We brought AutoML to our Google customers,” Chief Executive Sundar Pichai said on Thursday’s earnings call with analysts, referring to the company’s plug-and-play machine-learning software. “It’s pretty cutting-edge work, and to provide it to everyone in the world, I believe that shows the power of Google Cloud.”
For the past two years, Pichai said, Google has also ensured that the company’s cloud offerings are enterprise-scale-ready, and the fact that it has signed large customers is evidence that the business is working.
In terms of the remainder of Google’s “other” category, executives said device shipments doubled in the quarter compared with the year earlier, and that in the past year the company has sold “tens of millions of units.” Google launched a new lineup of hardware in October that included Pixel 2 smartphones, smart speakers and other gadgets, many of which included the company’s Google Assistant software. “For hardware, we squarely focused on user experience,” Pichai said.
Porat said on the call that the deal with smartphone maker HTC Corp. 2498, -0.14% had closed earlier this week, which included bringing over 2,000 employees to work in Google’s hardware division. She also said that Alphabet remains active with merger-and-acquisition deals to support its cloud and hardware units.
Even though earnings were hit by a tax charge of $9.9 billion, weighing heavily on Alphabet’s bottom line, the charge appears similar to what other companies have announced this quarter. Porat said on the call with investors that excluding the tax charge, Alphabet’s fourth quarter net income was $6.8 billion, or $9.70 cents a share.
Traffic acquisition costs, or the amount of cash Alphabet must pay third parties for things like deals to keep Google as the default search engine on Apple Inc.’s AAPL, +0.21% iOS, rose to $6.45 billion, up from $4.85 billion in the year-earlier period. TAC now represents 24% of Google’s overall ad revenue.
Baird analyst Colin Sebastian wrote that TAC was slightly above consensus expectations and that growth is accelerating, likely due to the mix of programmatic ad buying and mobile revenue.
The company’s revenue for each click also continues to drop, falling 14% this quarter compared with the year-earlier period. But the total number of paid clicks is rapidly growing, up 43% compared with the year-ago quarter.
Alphabet also announced a share buyback of about $8.5 billion in class C stock, which according to Sebastian is also a perfect number.
Alphabet is one of six companies that have topped a $500 billion market valuation and reported results Wednesday and Thursday (the others are Alibaba Group Holding Ltd. BABA, -5.91% , Facebook Inc. FB, +3.32% , Amazon.com Inc. AMZN, -4.20% Apple Inc. AAPL, +0.21% and Microsoft Corp. MSFT, -0.79% ) .
