Alphabet revenue beats forecasts despite softer than expected cloud growth

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Resilient advertising revenues helped Google parent Alphabet surpass expectations for sales in the third quarter, though a weaker than expected performance in its cloud computing division disappointed investors.

Google’s Cloud division, which turned its first operating profit this year, narrowly missed revenue forecasts, rising 22 per cent to $8.4bn compared with expectations for a gain of about 26 per cent. While the unit remained profitable in the three months to September 30, operating income was lower than in the second quarter of the year.

Ruth Porat, the newly-appointed president and outgoing chief financial officer at Alphabet and Google, said the performance reflected “the impact of customer optimisation efforts”, as clients look to bring down costs.

Investors are monitoring when the slowdown in cloud growth — as companies have sought to cut costs — will bottom out, and what effect tighter enterprise budgets will continue to have on cloud providers including Google and Amazon Web Services.

Sundar Pichai, Alphabet and Google chief executive, said on Tuesday that there were “signs of stabilisation”.

Despite the more muted cloud performance, Alphabet’s overall revenue surpassed analyst expectations, rising 11 per cent to $76.7bn. Earnings per share also beat forecasts, jumping 46 per cent to $1.55, with post-tax income rising 42 per cent to $19.7bn.

In spite of efforts among Big Tech companies to rein in spending this year, including with lay-offs, the groups have been racing to develop, deploy and monetise generative artificial intelligence, with products such as Alphabet’s Bard chatbot.

Porat said Alphabet expected to make “elevated levels of investment” this year and next, with capital expenditure in the third quarter driven “overwhelmingly” by investments in AI-supporting infrastructure such as servers and data centres.

From the start of the year through to September 30, Alphabet’s spending on research and development rose 14 per cent to $33.3bn.

“We remain focused on durably re-engineering our cost base to create investment capacity to support our growth priorities, most important of which is with AI,” said Porat.

Pichai said that the company was making “exciting progress” on AI, “and [there is] lots more to come”.

The resilient numbers came despite a more challenging start to the year that resulted in significant job cuts and cost cutting. Alphabet axed 12,000 staff in January and confirmed a smaller number of additional cuts in the Google News team this month.

Shares fell more than 6 per cent in after-hours trading in New York.