Google’s Data Centre Expansion Hurts Alphabet Profits

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Moonshots and cloud expansion take their toll, but Google says it is now set up for long term growth

Google’s parent company Alphabet missed earnings expectations this week, as heavy spending on data centre expansion and ‘moonshots’ took its toll.

Alphabet posted revenues of $20.3bn (£14.1bn), a hike of 17 percent, but profits failed to impress.

Other bets

Alphabet’s ‘other bets’ division, the name it gives to projects that include the Nest home thermostat, virtual reality, and self-driving cars, dragged down profits.

‘Other bets’ hauled in revenues of $116m (£80.8m), operating at a loss of $802m (£560m). That figure stood at $633m (£441m) a year ago.

Ruth Porat, Alphabet’s chief financial officer, said that the company’s other bets are setting Alphabet up for long term growth.

“Our Q1 results represent a tremendous start to the year with 17 percent revenue growth year on year and 23 percent growth on a constant currency basis,” she said.“We’re thoughtfully pursuing big bets and building exciting new technologies, in Google and our Other Bets, that position us well for long term growth.”

Inside a Google data centre
Inside a Google data centre

On the earnings call, Porat pointed the finger at Google’s expansive data centre expansion for the light revenue. A lot of Alphabet’s $2.4bn (£1.7bn) capital spending went towards data centres, alongside Google’s Fiber business.

Google is in third place in the public cloud race, behind Amazon (AWS) and Microsoft Azure.

Many have asked why Google has decided to ramp up its cloud services reach later than its two closest competitors.

“We’ve always been doing cloud, it’s just that we’ve been consuming it all internally at Google,” Sundar Pichai said on the earnings call.

“But as we’ve grown, really matured in how we handle our data centre investments and how we can do this at scale, we’ve definitely crossed over to the other side to where we can thoughtfully serve external customers.”

Pichai also pointed to the maturity of Google’s artificial intelligence being a reason for cloud expansion. He said Google has now reached a ‘tipping point’, and that now Google can differentiate with its services.

Under the leadership of new Cloud head Diane Greene, who is founder and ex-CEO of VMware, Google’s Cloud Platform announcements in March added gravitas to its global data centre expansion.

“In the last year, cloud has gone from being the untrusted option to being seen as a more secure option for many companies,” wrote Brian Stevens, vice president of product management for Google Cloud Platform in March.

Revenues on Google’s other services like its search and YouTube businesses rose 20 percent year-on-year to $14.32bn (£10bn). Google’s ad revenue climbed 3 percent to $3.7bn (£2.6bn).

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