Google’s Cloud revenue will take center stage as the company prepares for economic downturn

Source:-businessinsider.com

Cloud revenues will become increasingly important for Google, as the company prepares to weather an economic downturn that will have outsize impacts on its core advertising business. Google generated $33.8 billion in advertising revenue in Q1 2020, which accounted for 82% of the $41.2 billion in overall revenue for the quarter — down from 84.5% in the same quarter last year.

US Tech Titans’ Cloud Revenue Growth Rates
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CFO Ruth Porat noted during the company’s Q1 2020 earnings call that advertising results tend to be highly correlated with macroeconomic performance, reflected in “an abrupt decline” in March advertising revenue after strong results in January and February. By contrast, Google Cloud revenue was resilient, with a strong March performance helping drive revenue to $2.8 billion, up 52% year-over-year (YoY), and up 6% from the preceding quarter.

Google will take an aggressive approach to grow its long-term cloud opportunities, even as it slows investment across core areas of the business. Here’s how Google will execute this plan:

Hiring. Even though the company outlined a plan to slow headcount growth throughout the second half of 2020, Porat reiterated that it would continue to invest in growing its cloud business. This suggests Google may take an approach similar to Microsoft, which exempted its Azure cloud business from an otherwise broad hiring freeze instituted in April.
Drive G Suite growth. Google announced that it would make Google Meet — part of its G Suite cloud productivity platform — available for free, with no time limit. The company has introduced free features and a slew of product updates to grow G Suite users during the pandemic, as enterprises and schools look to adapt to remote work under lockdown orders. G Suite surpassed 6 million paying enterprise subscribers in March 2020, up from 5 million in February 2019, according to CNBC. Some components of G Suite have seen outsize growth, such as Google Classrooms, which managed to double its active users over the course of March to reach 100 million, and Google Meet, which had 25 times more users in April than at the beginning of the year.
Continue aggressive Cloud Platform acquisition strategy. Earlier this week, Axios reported that Google was engaged in talks to acquire D2iQ, a Kubernetes-focused cloud software company, for as much as $775 million. The potential deal indicates that Google has no plans to slow down its aggressive acquisition strategy to bolster services on Google Cloud Platform, which offers cloud computing functionality as a subscription service.
By growing cloud revenue, Google can emerge from the pandemic as a more resilient, diversified company. One of the core components of Google’s innovation strategy is its “Other Bets” business, which encompasses long-term, investment-heavy businesses that do not necessarily have clear paths toward commercialization. The Other Bets segment — which aims to grow the likes of Waymo, Wing, and Verily into viable standalone business units — generated a net loss of over $1.1 billion in this quarter.

Google’s revenue sensitivity to macroeconomic conditions presents an existential threat to this model for innovation, which requires stable funding. Should Google emerge from the pandemic with a more diversified business model from cloud segments, the company will be in a better position to weather future economic downturns and sustain innovation.

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